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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 26, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-3189
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NATHAN'S FAMOUS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3166443
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Old Country Road, Westbury, New York 11590
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 338-8500
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Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value $.01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 6, 2000 was approximately $21,560,609.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of June 6, 2000,
there were 7,040,199 shares of Common Stock, par value $.01 per share
outstanding.
Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14-A of the Securities
Exchange Act of 1934.
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PART I
ITEM 1. BUSINESS
As used herein, unless we otherwise specify, the terms "we," "us," and
"our" mean Nathan's Famous, Inc. and its subsidiaries, including Miami Subs
Corporation, owner of the Miami Subs brand, and NF Roasters Corp., owner of the
Kenny Rogers brand.
We have historically operated and franchised or licensed fast food units
featuring Nathan's famous brand all beef frankfurters, fresh crinkle-cut french
fried potatoes, and a variety of other menu offerings. Our Nathan's brand
company-owned and franchised units operated under the name "Nathan's Famous,"
the name first used at our original Coney Island restaurant opened in 1916.
Since fiscal 1997, we supplemented our Nathan's franchise program with our
Branded Product Program which enables foodservice retailers to sell some of
Nathan's proprietary products outside of the realm of a traditional franchise
relationship. During fiscal 2000, we acquired the intellectual property rights,
including trademarks, recipes and franchise agreements of Roasters Corp. and
Roasters Franchise Corp. and also completed a merger with Miami Subs Corporation
whereby we acquired the remaining 70% of Miami Subs common stock we did not
already own.
Over the past five years, we have focused on developing our restaurant
system by operating company-owned restaurants and opening franchised or licensed
restaurants, developing complimentary lines of business, such as expanding our
supermarket licensing program of our Nathan's brand, implementing our Nathan's
Branded Product Program, and developing an international master franchising
program. We have selectively co-branded Nathan's with other nationally
recognized brands such as Pizza Hut and TCBY Treats. In an effort to expand our
restaurant system and expand our brand portfolio, during fiscal 2000 we
completed our merger with Miami Subs Corp. and our acquisition of the
intellectual property of the Kenny Rogers Roasters franchise system. In
addition, through our acquisition of Miami Subs, we also secured certain
exclusive co-branding rights to use the Arthur Treachers brand within the United
States. We will seek to capitalize on the immediate co-branding opportunities
within our existing restaurant system, as well as develop new multi-brand
marketing and development plans.
At March 26, 2000, our restaurant system, consisting of Nathan's Famous,
Kenny Rogers Roasters and Miami Subs restaurants, included 32 company-owned
units concentrated in the New York metropolitan area, New Jersey and Florida,
407 franchised or licensed units, including 24 carts, kiosks, and counter units,
8 units operating pursuant to management agreements with Miami Subs and over
1,000 branded product points of sale under the Nathan's Branded Product Program,
operating in 44 states, the District of Columbia, and 16 foreign countries.
We plan to take advantage of co-branding opportunities within the existing
restaurant system, seek to expand the scope and market penetration of our
Branded Product Program, further develop the restaurant operations of existing
company-owned and franchised or licensed outlets for all of our brands and open
new company-owned, franchised or licensed outlets of all of our brands in
traditional and captive market environments. We also plan to develop an
international presence through the use of master franchising agreements based
upon individual or combined use of all three brands.
We were incorporated in Delaware on July 10, 1992 under the name "Nathan's
Famous Holding Corporation" to act as the parent of a Delaware corporation
then-known as Nathan's Famous, Inc. On December 15, 1992, we changed our name to
Nathan's Famous, Inc. and our Delaware subsidiary changed its name to Nathan's
Famous Operating Corporation. The Delaware subsidiary was organized in October
1989 in connection with its reincorporation in Delaware from that of a New York
corporation named "Nathan's Famous, Inc." The New York Nathan's was incorporated
on July 10, 1925 as a successor to the sole proprietorship that opened the first
Nathan's restaurant in Coney Island in 1916. On July 23, 1987, Equicor Group,
Ltd. was merged with and into the New York Nathan's in a "going private"
transaction. The New York Nathan's, the Delaware subsidiary and Equicor may all
be deemed to be our predecessors.
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RECENT ACQUISITIONS
Pursuant to the Joint Plan of Reorganization of the Official Committee of
Franchisees of Roasters Corp. and Roasters Franchise Corp. as confirmed by the
U. S. Bankruptcy Court for the Middle District of North Carolina, Durham
Division, we acquired through our wholly owned subsidiary, NF Roasters Corp.,
the intellectual property rights, including trademarks, recipes and franchise
agreements of Roasters Corp. and Roasters Franchise Corp. for $1,250,000 in cash
plus related expenses, which was paid out of working capital on April 1, 1999.
On September 30, 1999, we completed our merger with Miami Subs and
acquired the remaining outstanding shares of Miami Subs in exchange for
2,317,980 shares of our common stock and warrants to acquire 579,040 additional
shares of our common stock at a price of $6.00 per share.
RESTAURANT OPERATIONS
Nathan's Concept and Menus
Our Nathan's concept offers a wide range of facility designs and sizes,
suitable to a vast variety of locations and features a core menu, consisting of
the "Nathan's Famous" all-beef frankfurters, fresh crinkle-cut french fries and
beverages. Nathans' menu is designed to be tailored to take advantage of
site-specific market opportunities by adding complementary food items to the
core menu. The Nathan's concept is suitable to stand alone or be co-branded with
other nationally recognized brands.
Nathans' hot dogs are all-beef and are free from all fillers and starches.
Hot dogs are flavored with the original secret blend of spices created by Ida
Handwerker in 1916, which historically have distinguished Nathans' hot dogs. Hot
dogs are prepared and served in accordance with procedures which have not varied
significantly in more than 80 years. Our signature crinkle-cut french fried
potatoes are featured at each Nathan's restaurant. Nathans' french fried
potatoes are cooked to order in 100% cholesterol-free corn oil. We estimate that
approximately 65% to 70% of sales in our company-owned units consist of Nathan's
famous hot dogs, crinkle-cut french fried potatoes and beverages.
Individual Nathan's restaurants supplement their core menu of hot dogs,
french fries and beverages with a variety of other quality menu choices:
chargrilled hamburgers, chargrilled chicken sandwiches, Philly Cheesesteaks,
selected seafood and other chicken items, a breakfast menu and assorted desserts
and snacks. While the number of supplemental menus carried varies with the size
of the unit, the specific supplemental menus chosen are tailored to local food
preferences and market conditions. Each of these supplemental menu options
consists of a number of individual items; for example, the hamburger menu may
include chargrilled bacon cheeseburgers, cheeseburgers, superburgers and "BLT"
burgers. We maintain the same quality standard with each of Nathan's
supplemental menus as we do with Nathans' core hot dog and french fried potato
menu. Thus, for example, hamburgers and sandwiches are prepared to order and not
pre-wrapped or kept warm under lights. Nathan's also has a "Kids Meal" program
in which various menu alternatives are combined with toys to appeal to the
children's market.
Nathans' prototype restaurant units are available in a range of sizes as
follows: Type A--300 to 1,200 sq. ft., Type B--approximately 2,200 sq. ft. and
Type C--approximately 4,000 sq. ft. We have also developed Nathan's prototype
carts, kiosks, and modular merchandising units, all designated as Type D. Type A
units may not have customer seating areas, although they may often share seating
areas with other fast food outlets in food court settings. Type B and Type C
units generally provide seating for 45 to 50 and 75 to 125 customers,
respectively. Type D units generally carry only the core menu. This menu is
supplemented by a number of other menu selections in Type A & B units and even
greater menu selection in Type C units.
We believe Nathan's carts, kiosks and modular units are particularly well-
suited for placement in non-traditional sites, such as airports, travel plazas,
stadiums, schools, convenience stores, entertainment facilities, military
facilities, business and industry food service, within larger retail operations
and other captive markets. Many of these smaller units have been designed
specifically to support our expanding Branded Product Program. All prototypes
utilize a uniform, contemporary design.
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Miami Subs Concept and Menu
Our Miami Subs concept features a wide variety of moderately priced lunch,
dinner and snack foods, including hot and cold submarine sandwiches, various
ethnic foods such as gyros, pita sandwiches and Greek salads, flame grilled
hamburgers and chicken breasts, chicken wings, fresh salads, ice cream and other
desserts. Soft drinks, iced tea, coffee, beer and wine are also offered.
Freshness and quality of breads, produce and other ingredients are
strongly emphasized in Miami Subs restaurants. The Miami Subs menu includes
low-fat selections such as salads, grilled chicken breasts, vegetarian items and
non-fat frozen yogurt which we believe are perceived as nutritious and appealing
to health conscious consumers. We believe Miami Subs has become known for
certain "signature" foods, such as grilled chicken on pita bread, cheese steak
subs and gyros on pita bread.
Miami Subs restaurants feature a distinctive decor unique to the Miami
Subs concept. The exterior of free-standing restaurants feature an unusual roof
design and neon pastel highlights for easy recognition. Interiors have a
tropical motif in a neon pink and blue color scheme with murals of fish,
mermaids, flamingos and tropical foliage. Exteriors and interiors are brightly
lit to create an inviting, attractive ambience to distinguish the restaurants
from its competitors. At March 26, 2000, 135 of the Miami Subs restaurants were
located in freestanding buildings, ranging between 2,000 and 5,000 square feet.
Miami Subs restaurants have also been scaled down to accommodate non-traditional
captive market environments.
Miami Subs restaurants are typically open seven days a week, generally
opening at 10:30 am, with many of the restaurants having extended late-night
hours. Indoor service is provided at a walk-up counter where the customer places
an order and is given an order number and a drink cup. The customer then
proceeds to a self service soda bar while the food is prepared to order.
Drive-thru service is provided at substantially all free-standing Miami Subs
restaurants. We estimate that drive-thru sales account for approximately 35% -
45% of Miami Subs sales.
Kenny Rogers Roasters Concept and Menu
The Kenny Rogers Roasters concept was first introduced in 1991 with the
idea of serving home-style family foods based on a menu centered around
wood-fire rotisserie chicken. Kenny Rogers Roasters' unique proprietary marinade
and spice formula, combined with wood-fire roasting in a specifically designed
rotisserie, became the basis of a breakthrough taste in rotisserie chicken. The
menu, design and service style were created to position the concept midway
between quick-serve and casual dining. This format, coupled with a customer
friendly environment developed for dine-in or take-home consumers, became the
precursor of the Kenny Rogers Roasters system.
The distinctive flavoring of our Kenny Rogers Roasters chicken is the
result of a two step process. Before any chicken is received in the restaurant,
our supplier marinates the chicken using a specially flavored proprietary
marinade. Then a second unique blend of spice is applied to the chicken prior to
cooking in the open flame wood-fire rotisserie in full view of customers at the
restaurant. Other entrees offered in Kenny Rogers Roasters restaurants typically
include Honey Bourbon BBQ ribs and rotisserie turkey. Complimenting Kenny Rogers
Roasters main courses are a wide variety of freshly prepared side dishes, corn
muffins, soups, salads and sandwiches. The menu offers a healthful alternative
to traditional quick-serve menu offerings that caters to families and
individuals.
The majority of existing Kenny Rogers Roasters restaurants are traditional
free standing buildings offering dine-in and drive thru delivery options ranging
in size between 3,000 and 4,000 sq. ft. with seating capacity for approximately
125 guests. Other prototype restaurant designs that are being considered include
kiosks, food court units and scaled down in-line and free standing restaurant
types.
We have recently begun to co-brand Kenny Rogers Roasters with Nathan's by
introducing Nathan's famous all-beef frankfurters, crinkle-cut french fries and
hamburger menu to supplement Roasters' core menu offerings. We believe
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that adding Nathan's products will compliment the Kenny Rogers menu by adding
strong lunchtime offerings to the existing predominant dinner offerings and
expect that the added variety will please and attract more families with
children.
Franchise Operations
At March 26, 2000, our franchise system, including our Nathan's, Miami
Subs and Kenny Rogers brands, consisted of 415 units operating in 28 states and
16 foreign countries.
Today, our franchise system counts among its 212 franchisees and licensees
such well known companies as Host Marriott Services USA, Inc., ARAMARK Leisure
Services, Inc., CA1 Services, Inc., Service America Corp., Ogden Services Corp.
and Sodexho USA. We continue to seek to market our franchising program to
larger, experienced and successful operators with the financial and business
capability to develop multiple franchise units.
As of March 26, 2000, Host Marriott operated 36 franchised outlets
including 19 units at airports and 17 units within highway travel plazas.
International Franchising
As of March 26, 2000, our franchisees operated 76 units in 15 foreign
countries having significant representations within Malaysia, the Philippines,
and the Mid-East. The vast majority of foreign operations consist of Kenny
Rogers Roasters units, although our Nathan's and Miami Subs brands also have
international franchise operations. During the current fiscal year, our
international franchising program opened 2 Nathan's units in Egypt and currently
has 3 additional units under various stages of development. Additionally, during
the year ended March 26, 2000, 1 unit opened in each of Puerto Rico, the
Dominican Republic and Malaysia and 2 units opened in the Philippines. We also
executed a Letter of Intent to enter into a Master Development Agreement for the
rights to Portugal and are currently in various stages of discussions for
development in up to 3 additional foreign countries.
Nathan's Franchise Program
Franchisees are required to execute a standard franchise agreement or
license agreement prior to opening each Nathan's Famous unit. Our current
standard Nathan's franchise agreement provides for, among other things, a
one-time $30,000 franchise fee payable upon execution of the agreement, a
monthly royalty payment based on 4.5% of restaurant sales and the expenditure of
2.5% of restaurant sales on advertising. We also offer a modified franchise
agreement tailored to meet the needs of franchisees who desire to operate a
Nathan's of a smaller size offering a reduced menu. The modified franchise
agreement provides for the initial franchise fee of $15,000 which is payable
upon execution of the agreement, monthly royalties of 4.5% and the expenditure
of 2.5% of restaurant sales on advertising. In some specific situations, we may
offer alternatives to the standard franchise agreement. Marriott and National
Restaurant Management, Inc., are among those who are not subject to the
requirement to spend a percentage of sales on advertising. The initial term of
the typical franchise agreement is 20 years, with a 15-year renewal option by
the franchisee, subject to conditions contained in the franchise agreement.
Our standard Nathan's license agreement provides for, among other things,
a monthly royalty payment based on 10% of restaurant sales up to $250,000, 8% of
restaurant sales between $250,000 and $500,000 and 6% of restaurant sales in
excess of $500,000 per annum. There is no one-time license fee upon execution of
the agreement or requirement to spend a percentage of restaurant sales on
advertising.
Franchisees are approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We do not offer any financing arrangements to our Nathan's franchisees.
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We provide numerous support services to our Nathan's franchisees. We
assist in and approve all site selections. Thereafter, we provide architectural
prototype plans suitable for restaurants of varying sizes and configurations,
for use in food-court, in-line and free-standing locations. We also assist in
establishing building design specifications, reviewing construction compliance,
equipping the restaurant and providing appropriate menus to coordinate with the
prototype restaurant design and location selected by the franchisee. We
typically do not sell food, equipment or supplies to our Nathan's franchisees.
We offer various management training courses for management personnel of
company-owned and franchised Nathan's restaurants. At least one restaurant
manager from each restaurant must successfully complete our mandated management
training program. We also offer additional operations and general management
training courses for all restaurant managers and other managers with supervisory
responsibilities. We provide standard manuals to each franchisee covering
training and operations, products and equipment and local marketing programs. We
also provide ongoing advice and assistance to franchisees.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. All
standards and specifications are developed by us and applied on a system-wide
basis. We continuously monitor franchisee operations and inspect restaurants.
Franchisees are required to furnish us with detailed monthly sales or operating
reports which assist us in monitoring the franchisee's compliance with its
franchise or license agreement. We make both announced and unannounced
inspections of restaurants to ensure that our practices and procedures are being
followed. We have the right to terminate a franchise if a franchisee does not
operate and maintain a restaurant in accordance with the requirements of its
franchise or license agreement. We also have the right to terminate a franchise
for non-compliance with certain other terms and conditions of the franchise or
license agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 26, 2000, franchisees have opened 21 new Nathan's franchised units
including 2 units in Egypt. We initiated termination of 2 Nathan's franchise
agreements for non-compliance during fiscal 2000.
Franchisees who desire to open multiple units in a specific territory
within the United States generally enter into a standard area development
agreement under which we receive an advance fee based upon the number of
proposed units which the franchisee is authorized to open. This advance is
credited against the franchise fee payable to us as provided in the standard
franchise agreement. In some circumstances, we may grant exclusive territorial
rights in foreign countries for the development of Nathan's units based upon
compliance with a predetermined development schedule. We require an exclusivity
fee be conveyed for such exclusive rights.
Miami Subs Franchise Program
Franchisees are required to execute a standard franchise agreement
relating to the operation of each Miami Subs restaurant. Currently, the term of
the franchise agreement is between five and 20 years, and the initial franchise
fee is $25,000 for traditional restaurants and $15,000 for certain
non-traditional restaurants. The standard franchise agreement provides for the
payment of a monthly royalty fee of 4.0% on gross restaurant sales for the term
of the franchise agreement, and additional charges based on a percentage of
restaurant sales, typically 3.0%, to support various system-wide and local
advertising funds.
In addition to individual franchise agreements, we have from time to time
entered into development agreements with certain franchisees. The development
agreement establishes a minimum number of restaurants that the franchisee is
required to open in an agreed upon exclusive area during the term of the
agreement. In addition to receiving a franchise fee for each restaurant opened,
we also receive a non-refundable fee based upon the number of restaurants
committed to be opened under the agreement.
Operations personnel train and assist Miami Subs franchisees in opening
new restaurants and monitor the operations of existing restaurants as part of
the support provided under the franchise program. New franchisees are
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required to complete a six-week training program. Upon the opening of a new
franchised restaurant, we typically send representatives to the restaurant to
assist the franchisee during the opening period. These company representatives
work in the restaurant to monitor compliance with Miami Subs' standards and
provide additional on-site training of the franchisee's restaurant personnel.
We also provide development and construction support services to our Miami
Subs franchisees. We review and approve plans and specifications for the
restaurants before improvements begin. Our personnel typically visit the
facility during construction to meet with the franchisee's site contractor and
to verify that construction standards are met.
New franchisees are required to complete a six-week program that features
various aspects of day-to-day operations and certification in all functioning
positions. The program consists of formal classroom training and in-restaurant
training, including human resources, accounting, purchasing and labor and food
handling laws. Generally, a team of our employees are provided for new
restaurants to conduct hands-on training and to ensure compliance with
standards. Standard operating manuals are provided to each franchisee.
To maintain uniformly high standards of appearance, service, food and
beverage quality for our Miami Subs restaurants, we have adopted policies and
implemented a monitoring program. Franchisees are expected to adhere to
specifications and standards in connection with the selection and purchase of
products used in the operation of the Miami Subs restaurant. Detailed
specifications are provided for the products used, and franchisees must request
approval for any deviations. We do not generally sell equipment, supplies or
products to our Miami Subs franchisees. The franchise agreement requires
franchisees to operate their restaurants in accordance with Miami Subs'
requirements. We require our franchisees use specified kitchen equipment to
maximize consistency and speed of food preparation. Ongoing advice and
assistance is provided to franchisees in connection with the operation and
management of each restaurant. Our area consultants are responsible for
oversight of franchisees and periodically visit each restaurant. During such
visits, the area consultant completes a report which contains evaluations on
speed of preparation for menu items, quality of delivered product, cleanliness
of restaurant facilities as well as evaluations of managers and other personnel.
The area consultants also make unannounced follow-up visits to ensure adherence
to operational specifications.
We also use information about the restaurants which is received from
customers on a Miami Subs' standardized "comment card" and maintain a toll-free
telephone number to receive customer comments.
Franchisees are required to furnish us with detailed monthly sales or
operating reports which assist us in monitoring the franchisee's compliance with
its franchise agreement. We have the right to terminate a franchise if a
franchisee does not operate and maintain a restaurant in accordance with the
requirements of its franchise agreement. We also have the right to terminate a
franchise for non-compliance with certain other terms and conditions of the
franchise agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the period October 1,
1999 through March 26, 2000, franchisees have opened 6 new Miami Subs franchised
units including 2 units in Puerto Rico and the Dominican Republic. During the
period October 1, 1999 through March 26, 2000, we initiated termination of 3
Miami Subs franchise agreements for such non-compliance.
Kenny Rogers Roasters Franchise Program
Kenny Rogers Roasters franchisees from the previous franchise system were
required to execute amended and restated franchise agreements in order to
preserve their franchised units. The amended and restated franchise agreement
affirmed the franchisees responsibilities and offered reduced royalty and
advertising fund payments for the first two years. Future Kenny Rogers Roasters
franchisees will have to execute our current standard franchise agreement which
provides for, among other things, a one-time $30,000 franchise fee payable upon
execution of the agreement, a monthly royalty payment based on 4.5% of
restaurant sales and the expenditure of 2.5% of restaurant sales on advertising.
In some specific situations, we may offer alternatives to the standard franchise
agreement. The initial term of the typical franchise agreement is 20 years, with
up to a 20-year renewal option by the franchisee, subject to conditions
contained in the franchise agreement.
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Franchisees are approved on the basis of their business background,
evidence of restaurant management experience, net worth and capital available
for investment in relation to the proposed scope of the development agreement.
We do not offer any financing arrangements to our Kenny Rogers Roasters
franchisees.
We will provide numerous support services to future Kenny Rogers Roasters
franchisees. We expect to assist in and approve all Kenny Rogers Roasters site
selections. Thereafter, we will provide architectural prototype plans suitable
for Kenny Rogers Roasters restaurants of varying sizes and configurations, for
use in food-court, in-line and free-standing locations. We will also assist in
establishing building design specifications, reviewing construction compliance,
equipping the restaurant and providing appropriate menus to coordinate with the
prototype restaurant design and location selected by the Kenny Rogers Roasters
franchisee. We typically will not sell food, equipment or supplies to our Kenny
Rogers Roasters franchisees.
We plan to offer various management training courses for management
personnel of Kenny Rogers Roasters company-owned and franchised restaurants. At
least one restaurant manager from each new restaurant or co-branded restaurant
will have to successfully complete Kenny Rogers Roasters' mandated management
training program. We also plan to offer additional operations and general
management training courses to all Kenny Rogers Roasters restaurant managers and
other managers with supervisory responsibilities. We provide standard manuals to
each franchisee covering training and operations, products and equipment and
local marketing programs. We also provide ongoing advice and assistance to
franchisees.
Franchised restaurants are required to be operated in accordance with
uniform operating standards and specifications relating to the selection,
quality and preparation of menu items, signage, decor, equipment, uniforms,
suppliers, maintenance and cleanliness of premises and customer service. We
develop all standards and specifications, which are applied on a system-wide
basis. We continuously monitor franchisee operations. Franchisees are required
to furnish us with detailed monthly sales or operating reports which assist us
in monitoring the franchisee's compliance with its franchise or license
agreement. We have the right to terminate a franchise if a franchisee does not
operate and maintain a restaurant in accordance with the requirements of its
franchise or license agreement. We also have the right to terminate a franchise
for non-compliance with certain other terms and conditions of the franchise or
license agreement such as non-payment of royalties, sale of unauthorized
products, bankruptcy or conviction of a felony. During the fiscal year ended
March 26, 2000, we initiated termination of 2 Kenny Rogers Roasters franchise
agreements for such non-compliance.
Franchisees who desire to open multiple units in a specific territory
within the United States generally enter into a standard area development
agreement under which we receive an advance fee based upon the number of
proposed units which the franchisee is authorized to open. This advance is
credited against the franchise fee payable to us, as provided in its standard
franchise agreement. In some circumstances, we may grant exclusive territorial
rights, in foreign countries, for the development of Kenny Rogers Roasters units
based upon compliance with a predetermined development schedule. We may require
that an exclusivity fee be conveyed for these rights.
Our Nathan's Operations
As of March 26, 2000, we operated 19 company-owned Nathan's units,
including one kiosk, in New York and New Jersey. Three of our Nathans'
restaurants are older and significantly larger units which do not conform to
current prototype designs. These units carry a broader selection of menu items
than current prototype designs. The items offered at our restaurants, other than
the core menu, tend to have lower margins than the core menu. The older units
required significantly higher levels of initial investment than current
franchise prototypes and tend to operate at a lower sales/investment ratio.
Consequently, we do not intend to replicate these units in our planned expansion
of company-owned units.
We entered into a food service lease agreement with Home Depot U.S.A.,
Inc. under which we lease space in certain Home Depot Improvement Centers to
operate Nathan's restaurants. The term of each Home Depot agreement
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is five years from the date on which the Nathan's restaurant opens, with two
five year renewal options. We currently operate 7 units within Home Depot
Improvement Centers, including 1 kiosk.
Company-owned units currently range in size from approximately 440 square
feet to 10,000 square feet and are located principally in retail shopping
environments or are free-standing buildings. Some restaurant designs do not
include seating and others include seating for 100 to 300 customers. The
restaurants are designed to appeal to all ages and generally are open seven days
a week. We have established high standards for food quality, cleanliness and
service at our restaurants and regularly monitor the operations of our
restaurants to ensure adherence to these standards. Restaurant service areas,
seating, signage and general decor are contemporary. The average check at our
comparable company-owned restaurants was approximately $5.69 for fiscal 2000.
Our Miami Subs Operations
As of March 26, 2000, we operated 11 Miami Subs restaurants, including
nine located in Florida, one in Texas and one in New York. All but one of our
Miami Subs restaurants are free-standing restaurants offering drive thru
operations as well as dine in seating. These restaurants generally are
approximately 3,000 square feet with seating capacity for approximately 90
guests.
We use kitchen equipment in our Miami Subs restaurants which is designed
to be versatile, improve product consistency, and facilitate menu modifications.
Fresh meats and other products, which are purchased in pre-weighed individual
servings, can be consistently cooked-to-order automatically. The average check
at the comparable company-owned restaurants was approximately $5.11 for the
period ended December 1999.
We began to test a re-engineered Miami Subs menu in January 2000 within
three of our company-owned Miami Subs restaurants. The success of this effort
has lead to the further introduction of these changes into our remaining
company-owned restaurants in Southern Florida. We are also currently testing the
inclusion of certain Nathan's signature products in selected Miami Subs
restaurants. When we finish these tests, we expect to introduce these changes to
many of our Miami Subs franchisees. As part of our acquisition strategy, we are
actively looking to close up to five of the Miami Subs company-operated
restaurants that we operated at March 26, 2000.
Our Kenny Rogers Roasters Operations
At March 26, 2000, we operated one Kenny Rogers Roasters restaurant in
Rockville Centre, NY that opened on March 21, 2000. Our second company-owned
Kenny Rogers restaurant opened in Commack, NY in April 2000. These units are
traditional free-standing buildings, each with a drive thru, and boast a new
interior design and decor package featuring simulated weather-washed woodwork
accentuated with earthtones. Custom wall murals have been painted that are
complimented with hanging memorabilia. In addition to the standard Kenny Rogers
Roasters menu, both restaurants feature Nathan's all-beef frankfurters,
crinkle-cut french fries, chargrilled hamburgers and other select Nathan's menu
items, including a newly formulated kids' menu.
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Location Summary
The following table shows the number of our company-owned and franchised or
licensed units in operation or under development at March 26, 2000 and their
geographical distribution:
Franchise
Location Company or License(1) Total
- -------- ------- ------------- -----
Alabama - 3 3
Arizona - 3 3
California - 8 8
Colorado - 1 1
Connecticut - 4 4
Florida 9 131 140
Georgia - 2 2
Idaho - 2 2
Illinois - 1 1
Indiana - 2 2
Maryland - 6 6
Massachusetts - 2 2
Minnesota - 2 2
Mississippi - 2 2
Missouri - 1 1
Nevada - 10 10
New Hampshire - 1 1
New Jersey 4 50 54
New York 18 65 83
North Carolina - 17 17
Oregon - 1 1
Pennsylvania - 9 9
Rhode Island - 1 1
South Carolina - 2 2
Tennessee - 2 2
Texas 1 8 9
Utah - 2 2
Wisconsin - 1 1
----- ----- -----
Domestic Subtotal 32 339 371
----- ----- -----
International Locations
Aruba - 1 1
Canada - 3 3
China - 5 5
Cypress - 1 1
Dominican Republic - 2 2
Egypt - 4 4
Indonesia - 1 1
Israel - 1 1
Malaysia - 21 21
Philippines - 27 27
Puerto Rico - 3 3
Sabah - 1 1
Saudi Arabia - 1 1
Singapore - 4 4
United Arab Emirates - 1 1
----- ----- -----
International Subtotal - 76 76
----- ----- -----
Grand Total 32 415 447
----- ----- -----
(1) Includes 8 units operating by third parties pursuant to management
agreements.
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Branded Product Program
During fiscal 1998, we launched our "Branded Product Program" for our
Nathan's Famous brand in which qualified foodservice operators may offer
Nathans' hot dogs and certain other proprietary items for sale within their
facilities. In conjunction with this program, foodservice operators are granted
a limited use of the Nathans' trademark for the sale of hot dogs and certain
other proprietary food items and paper goods. We sell the products directly to
various distributors who resell these proprietary products to retailers. During
the current fiscal year, over 300 new points of sale featuring Nathan's hot dogs
have been added to the program, bringing the total to over 1,000 branded points
of sale. The flexibility of this program allows us to market the Nathan's brand
and sell Nathan's hot dogs thru new and varied means of distribution. For
example, Nathan's pre-packaged branded hot dogs are being sold through vending
machines, convenience stores and club stores pursuant to exclusive distribution
agreements with The Compass Group and Pierre Foods. Other venues that now
feature Nathan's hot dogs through the Branded Product Program include hospitals,
casinos, department stores, colleges, Business & Industry accounts, beaches and
sports arenas and stadiums. We are proud to be part of the menu offerings at
Walter Reed Hospital, Caesar's Palace, UCLA, Bradlees Department stores, Jones
Beach, The Kennedy Space Center and being named the official hot dog of the New
York Yankees for the 2000 season.
Expansion Program
The foundation of our expansion program centers around our marketing of
each brands' signature products. We expect to focus on introducing each brands'
signature products through co-branding efforts within our existing restaurant
system, opening new units for each brand on an individual and on a co-branded
basis and expanding product distribution through alternative means such as
branded products or supermarket licensing arrangements.
We plan to open selectively new company-owned units, concentrated within
the New York metropolitan area and in Southern Florida using a co-branded
format. Existing company-owned units are principally located in the New York
metropolitan area and Southern Florida where we have extensive experience in
operating restaurants in these markets. We intend to consider new opportunities
in both traditional and captive market settings.
We anticipate that we will also accelerate opening new franchised units of
all three brands individually and develop new co-branded outlets. We believe
that a significant opportunity exists to redefine the Miami Subs concept into a
co-branded food court while maintaining the concept's overall look and feel. We
have recently engaged an imaging and design firm to assist us in determining the
optimum facility design for the three brands and developing certain prototype
restaurants.
During fiscal 2001, we expect to open approximately 30-35 new franchised
and /or licensed units for all three of our brands and to introduce co-branded
products in over 50 existing units.
We expect that during fiscal 2001 our international development efforts
will take on added dimensions as a result of the co-branding opportunities that
we now offer. We believe that in addition to restaurant franchising of our three
brands, there is the opportunity to increase revenues by offering master
development agreements to qualified persons or entities allowing for the
operation of franchised restaurants, subfranchising restaurants to others,
licensing the manufacture of our signature products, selling our signature
products through supermarkets and allowing for the further development of our
Branded Product Program. Qualified persons or entities must have satisfactory
foodservice experience managing multiple units, the appropriate infrastructure
and the necessary financial resources to support the business development. We
have also retained a consultant to assist in the development and marketing
efforts of our international program.
We will also seek to further develop our Branded Product Program in fiscal
2001 which may include certain Miami Subs products, Kenny Rogers Roasters
products and additional Nathan's products, as well as through the addition of
new points of sale. We believe that as consumers look to assure confidence in
the quality of the food that they purchase, there is great potential to increase
our sales by converting existing sales of non-branded products into branded
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products throughout the foodservice industry, by franchisees, licensees or
retailers by utilizing branded modular merchandising units, carts, kiosks and
restaurants.
Co-branding
We believe that there is a substantial opportunity for co-branding among
our family of brands. In addition to the three brands that we own, as part of
the Miami Subs acquisition we also acquired certain exclusive co-branding rights
for the use of the brand "Arthur Treachers Fish & Chips" within the United
States.
Initially, our strategy will emphasize co-branding within our existing
restaurant system. "Host Restaurants" would continue to operate pursuant to
their current franchise agreements and would simply execute an addendum to their
agreement which would define the terms of our co-branding relationship.
We believe that our brand offerings compliment each other and will enable
us to market franchises of co-branded units and co-branding to existing units.
The Nathan's and Miami Subs products are typically stronger lunch time brands
while the Kenny Rogers Roasters and Arthur Treachers brands are generally
stronger dinner brands. We expect that the added variety will please and attract
a more diverse audience, including more families with children.
To date, we have introduced Arthur Treachers products in over 60 Miami
Subs locations, 12 company-owned or franchised Nathan's restaurants and
introduced Nathan's products into 3 Arthur Treachers restaurants. We are also
testing different variations of the Nathan's menu in 12 Miami Subs restaurants
in Florida. We recently began co-branding Kenny Rogers Roasters with Nathan's by
introducing Nathan's Famous all-beef frankfurters, crinkle-cut french fries and
hamburger menu to further supplement Roasters core menu offerings. We also
intend to test the introduction of certain Kenny Rogers Roasters signature
products into Nathan's and Miami Subs restaurants, and if successful, plan to
make those products available to both systems.
We expect to market co-branded units within the United States and
internationally. We believe that a multi- branded restaurant concept offering
strong lunch and dinner day parts will be very appealing to both consumers and
potential franchisees. Such restaurants should allow the operator to increase
sales and leverage the cost of real estate and other fixed costs which may
provide superior investment returns as compared to many restaurants that are
single branded.
Licensing Program
We license SMG, Inc. to produce packaged hot dogs and other meat products
according to Nathans' proprietary recipes and spice formulations, and to use
"Nathan's Famous" and related trademarks to sell these products on an exclusive
basis in the United States to supermarkets, groceries and other outlets, thereby
providing foods for off-premises consumption. The SMG agreement expires in 2014
and provides for royalties ranging between 3% to 5% of sales. The percentage
varies based on sales volume, with escalating minimum royalties. Earned
royalties of $1,432,000 in fiscal 2000 exceeded the contractual minimum
established under the agreement. We believe that the overall exposure of the
brand and opportunity for consumers to enjoy the "Nathan's Famous" hot dog in
their homes helps promote "Nathan's Famous" restaurant patronage. Hot dog sales
are concentrated in the New York metropolitan area, New England, Florida and
California. Royalties from SMG provided the majority of our fiscal 2000 retail
license revenues.
In November 1997, we executed a license agreement with J.J. Mathews & Co,
Inc. to market a variety of Nathan's packaged menu items for sale within
supermarkets and groceries. The agreement calls for us to receive royalties
based upon sales, subject to minimum annual royalties, as specified in the
agreement. During fiscal 2000, we received the minimum royalties of $150,000
payable for calendar 1999.
Our products are also distributed under licensing agreements with Gold
Pure Food Product's Co., Inc. and United Pickle Packers, Inc. Both companies
license the "Nathan's Famous" name for the manufacture and sale of various
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condiments including mustard, salsa, sauerkraut and pickles. These products have
been distributed on a limited basis. Fees and royalties earned during fiscal
2000 have not been significant.
PROVISIONS AND SUPPLIES
Our proprietary hot dogs are produced by SMG and Russer Foods, a division
of IBP, Inc., in accordance with Nathans' recipes, quality standards and
proprietary spice formulations. John Morrell & Company, our licensee prior to
SMG, has retained the right to produce Nathans' proprietary spice formulations.
Kenny Rogers Roasters proprietary chicken is produced by ConAgra based upon
exacting quality, weight, processing and packaging standards. Proprietary
marinade and spice formulations are produced by McCormick and Co., Inc. All
other company provisions are purchased and obtained from multiple sources to
prevent disruption in supply and to obtain competitive prices. We approve all
products and product specifications. We negotiate directly with our suppliers on
behalf of the entire system for all primary food ingredients and beverage
products sold at its restaurants to ensure adequate supply of high quality items
at competitive prices.
We have recently unified our distribution source for all of our brands by
executing a national food distribution contract with U.S. Foodservice. This new
agreement enables all of our restaurant operators to order and receive
deliveries for the majority of their food and paper products directly through
this distributor. We believe that this arrangement is efficient, more cost
effective than having multiple distributors and facilitates quality control.
MARKETING, PROMOTION AND ADVERTISING
We maintain advertising funds for local, regional and national advertising
under the Nathan's Famous Systems, Inc. Franchise Agreement. Nathans'
franchisees are generally required to spend on local marketing activities or
contribute to the advertising funds up to 2.5% of restaurant sales for
advertising and promotion. Marriott and National Restaurant Management, Inc. are
among the current franchisees who are not subject to this requirement. If a
cooperative advertising program exists in the franchised area, the applicable
percentage can be contributed to that program. Where no cooperative advertising
program is available, up to 1% of the franchisees' advertising budget must be
contributed to the advertising funds for national marketing support. The balance
must be expended on programs approved by us as to form, content and method of
dissemination. Through March 26, 2000, our gross spending for marketing
activities was approximately 2.9% of our Nathan's company-owned restaurant
sales.
Through March 26, 2000, we continued Nathans' primary marketing emphasis
on local store marketing campaigns featuring a value oriented strategy
supplemented with promotional "Limited Time Offers." We anticipate that
near-term marketing efforts for Nathan's will continue to emphasize local store
marketing activities.
These activities were supported by a regional newsprint campaign during
the summer of 1999. As the concentration of "Nathan's Famous" restaurants in
particular geographic areas increases, we believe the opportunity for effective
regional media advertising may exist.
In addition, SMG promotes and advertises the "Nathan's Famous" packaged
retail brand, particularly in the New York metropolitan area, California, the
greater Boston area, Phoenix, Arizona and throughout Florida. We believe that
the advertising by SMG increases brand recognition and thereby indirectly
benefits Nathan's restaurants in the areas in which SMG conducts its campaigns.
From time to time, we also participate with SMG in joint promotional activities.
We maintain separate advertising funds on behalf of the Kenny Rogers
Roasters franchise system for regional and national advertising under the NF
Roasters Corp. Franchise Agreement. Franchisees who signed up to participate in
the new system are required to contribute to the advertising funds .50% of
restaurant sales for advertising and promotion for the year April 1, 1999
through March 31, 2000 and .75% of restaurant sales for advertising and
promotion thereafter. However, contributions to the marketing fund for the year
April 1, 2000 through March 31, 2001 have been waived. New franchisees will be
expected to spend on local marketing activities or contribute to the advertising
funds up to 2.5% of restaurant sales for advertising and promotion.
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During the year, the Kenny Rogers Roasters ad fund's primary focus has
been toward brand building and utilizing promotional "Limited Time Offers".
These activities were further supported by activities such as regional free
standing newspaper inserts and the introduction of new point of purchase
materials. We anticipate that near term marketing efforts for Kenny Rogers
Roasters will continue to emphasize local store marketing activities.
We maintain a separate Production Advertising Fund for the creation and
development of advertising, marketing, public relations, research and related
programs for the Miami Subs system, as well as for other activities that we may
deem appropriate. Franchisee and company-operated restaurants contribute 1.0% of
each restaurants' gross sales to this fund. In addition, we maintain certain
Regional Advertising Funds in which franchised and company-operated restaurants
in the region contribute 2.0% of each restaurants' gross sales. If a restaurant
is not located in an area where a regional advertising fund has been
established, the franchisee or company-operated restaurant is required to spend
at least 2.0% of the restaurants' gross sales for local advertising.
Our Miami Subs advertising programs principally use radio and print, and
carry the theme that Miami Subs offers a variety of menu selections at
competitive, fast food prices. Our Miami Subs radio advertisements are broadcast
principally in markets where there are sufficient restaurants to benefit from
such advertisements.
The physical facility of each Miami Subs restaurant represents a key
component of our Miami Subs marketing strategy. The restaurants have well-lit
exteriors featuring a distinctive roof design, an abundance of pastel neon
lights and a lively interior featuring a tropical motif which we believe creates
strong appeal during the day and night.
GOVERNMENT REGULATION
We are subject to Federal Trade Commission ("FTC") regulation and several
state laws which regulate the offer and sale of franchises. We are also subject
to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship.
The FTC's "Trade Regulation Rule Concerning Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures" requires
us to provide disclosure of specified information to prospective franchisees.
Fifteen states, including New York, also require similar disclosure. While the
FTC rule does not require registration or filing of the disclosure document,
fourteen states require franchisors to register the disclosure document (or
obtain exemptions from that requirement) before offering or selling a franchise.
The laws of seventeen other states require some form of registration under
"business opportunity" laws, which sometimes apply to franchisors such as
Nathan's, Kenny Rogers Roasters and Miami Subs.
Laws which regulate one or another aspect of the franchisor-franchisee
relationship presently exist in twenty-one states and the District of Columbia.
These laws regulate the franchise relationship by, for example, requiring the
franchisor to deal with its franchisees in good faith, prohibiting interference
with the right of free association among franchisees, limiting the imposition of
standards of performance on a franchisee, and regulating discrimination among
franchisees in charges, royalties or fees. These laws have not precluded us from
seeking franchisees in any given area. Although these laws may also restrict a
franchisor in the termination of a franchise agreement by, for example,
requiring "good cause" to exist as a basis for the termination, advance notice
to the franchisee of the termination, an opportunity to cure a default and
repurchase of inventory or other compensation, these provisions have not had a
significant effect on our operations.
We are not aware of any pending franchise legislation which we believe is
likely to significantly affect our operations. We believe that our operations
comply substantially with the FTC rule and state franchise laws.
Each company-owned and franchised restaurant is subject to regulation by
federal agencies and to licensing and regulation by state and local health,
sanitation, safety, fire and other departments. Difficulties or failures in
obtaining the required licenses or approvals could delay or prevent the opening
of a new restaurant.
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We are also subject to the Federal Fair Labor Standards Act, which governs
minimum wages, overtime, working conditions and other matters. We are also
subject to other federal and state environmental regulations, which have not had
a material effect on our operations. More stringent and varied requirements of
local governmental bodies with respect to zoning, land use and environmental
factors could delay or prevent development of new restaurants in particular
locations. In addition, the federal Americans with Disabilities Act ("ADA")
applies with respect to the design, construction and renovation of all
restaurants in the United States. Compliance with the ADA's requirements could
delay or prevent the development of, or renovation to restaurants in certain
locations, as well as add to the cost of such development.
Each of the companies which manufactures, supplies or sells our products
is subject to regulation by federal agencies and to licensing and regulation by
state and local health, sanitation, safety and other departments. Difficulties
or failures by these companies in obtaining the required licenses or approvals
could adversely effect our revenues which are generated from these companies.
Alcoholic beverage control regulations requires each restaurant that sells
such products to apply to a state authority and, in certain locations, county
and municipal authorities for a license or permit to sell alcoholic beverages on
the premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the restaurants, including
minimum age of customers and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages. At March 26, 2000, we offered for sale beer and wine in 7
of our existing company-operated Miami Subs restaurants. Each of these
restaurants have current alcoholic beverage licenses permitting the sale of
these beverages. We have never had an alcoholic beverage license revoked.
We may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to
such person. We carry liquor liability coverage as part of its existing
comprehensive general liability insurance and have never been named as a
defendant in a lawsuit involving "dram-shop" statutes.
We believe that we operate in substantial compliance with applicable laws
and regulations governing our operations.
EMPLOYEES
At March 26, 2000 we had approximately 871 employees, of whom 79 were
corporate management and administrative employees, 131 were restaurant managers
and 661 were hourly full-time and part-time food-service employees. Food-service
employees at five locations are represented by Local 1115-NY a division of
District 1115, AFL - CIO CLC, under various agreements which will expire in
April 2003. We consider our employee relations to be good and have not suffered
any strike or work stoppage for more than 28 years.
We provide a training program for managers and assistant managers of our
new company-owned and franchised restaurants. Hourly food workers are trained,
on site, by managers and crew trainers following company practices and
procedures outlined in its operating manuals.
TRADEMARKS
We hold trademark and service mark registrations for NATHAN'S FAMOUS,
NATHAN'S and Design, NATHAN'S FAMOUS SINCE 1916 and SINCE 1916 NATHAN'S FAMOUS
within the United States with some of these marks holding corresponding foreign
trademark and service mark registrations in more than 20 jurisdictions. We also
hold various related marks for restaurant services and some food items.
We hold trademark and service mark registrations for "Kenny Rogers
Roasters Wood Fire Roasted Chicken", "It's the Wood that Makes It Good", "Kenny
Rogers Roasters & Design", " Down Right Kickin BBQ Chicken",
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"Everyone Else Is Just Plain Chicken", "There's Goodness Here", "When you choose
Kenny Rogers Roasters, your heart is in the right place", "You're Gonna Love
this Food", "Your Heart is in the Right Place" and "Roastie" within the United
States. Some of these marks, as well as "Kenny Rogers Roasters" and the original
Kenny Rogers logo, hold corresponding foreign trademark and service mark
registrations in more than 80 jurisdictions.
We have registered the marks "Miami Subs and Design" and "Miami Subs Grill
and Design" with the United States Patent and Trademark Office. In addition, the
marks have been registered in approximately 50 foreign countries.
We believe that our trademarks and service marks provide significant value
to us and are an important factor in the marketing of its products and services.
We believe that we do not infringe on the trademarks or other intellectual
property rights of any third parties.
COMPETITION
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and the availability of an adequate
number of hourly paid employees can also adversely affect the fast food
restaurant industry.
Our restaurants compete with numerous restaurants and drive-in units
operating on both a national and local basis, including major national chains
with greater financial and other resources than ours. Changes in pricing or
other marketing strategies by these competitors can have an adverse impact on
our sales, earnings and growth. We also compete with local restaurants and
diners on the basis of menu diversity, food quality, price, size, site location
and name recognition. There is also active competition for management personnel
as well as suitable commercial sites for restaurants.
We believe that our emphasis on our signature products and the reputation
of these products for taste and quality set us apart from our major competitors.
As fast food companies have experienced flattening growth rates and declining
average sales per restaurant, some of them have adopted "value pricing" and or
deep discount strategies. These strategies could have the effect of drawing
customers away from companies which do not engage in discount pricing and could
also negatively impact the operating margins of competitors which attempt to
match their competitors' price reductions. We have introduced our own form of
"value pricing," selling combinations of different menu items for a total price
lower than the usual sale price of the individual items and other forms of price
sensitive promotions. Extensive price discounting in the fast food industry
could have an adverse effect on us.
We also compete for the sale of franchises with many franchisors of
restaurants and other business concepts to qualified and financially capable
franchisees and with numerous companies for the sale and distribution of our
licensed hot dogs and other packaged foods, within supermarkets, primarily on
the basis of reputation, flavor, quality and price.
ITEM 2. PROPERTIES
Our principal executive offices consist of approximately 12,000 sq. ft. of
leased space in a modern, high-rise office building in Westbury, New York. We
also own Miami Subs' regional office consisting of approximately 8,500 sq. ft.
in Fort Lauderdale, Florida. We also own four restaurant properties consisting
of a, 2,650 sq. ft. Nathan's restaurant, at 86th Street in Brooklyn, New York,
located on a 25,000 sq. ft. lot, a 3,100 sq. ft. Miami Subs restaurant operating
in Miami, FL, a 2,400 sq. ft. Miami Subs restaurant in Largo, FL, located on a
47,000 sg. ft. lot and a 2,600 sq. Ft. Miami Subs restaurant in Miami, FL,
located on a 25,000 sq. ft. lot. At March 26, 2000, other company-owned
restaurants which were operating or developed were located in leased space with
terms expiring as shown in the following table:
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Current Lease Approximate
Location Expiration Date Square Footage
-------- --------------- --------------
Nathan's Restaurants
--------------------
Coney Island Brooklyn, NY December 2008 10,000
Coney Island Boardwalk Brooklyn, NY October 2000 440
Kings Plaza Shopping Center Brooklyn, NY September 2010 4,200
Long Beach Road Oceanside, NY May 2001 7,300
Central Park Avenue Yonkers, NY April 2000 10,000
Livingston Mall Livingston, NJ December 2000 2,650
Paramus Park Shopping Center (1) Paramus, NJ --- ---
Jericho Turnpike Commack, NY March 2003 3,200
Hempstead Turnpike Levittown, NY September 2004 4,100
Broad Hollow Road Farmingdale, NY April 2003 2,200
Woodbridge Center (2) Woodbridge, NJ May 2000 3,000
Jericho Home Depot Jericho, NY September 2004 1,500
Copaigue Home Depot Copaigue, NY April 2005 1,200
Flushing Home Depot Flushing, NY June 2005 1,500
Elmont Home Depot Elmont, NY October 2005 1,500
Union Home Depot Union, NJ January 2008 960
Staten Island Home Depot Staten Island, NY July 2007 1,680
Brooklyn Home Depot Brooklyn, NY March 2008 950
Kenny Rogers Roasters
- ----------------------
Commack Roasters Commack, NY October 2013 3,100
Rockville Centre Roasters Rockville Centre, NY April 2018 4,000
Miami Subs Restaurants
----------------------
17th Street Ft. Lauderdale, FL August 2003 3,000
Lauderhill Lauderhill, FL May 2002 4,000
Okeechobee West Palm Beach, FL December 2001 3,500
South Miami Miami, FL August 2006 3,500
Lejune and 11th Miami, FL September 2002 2,500
Boca Raton Boca Raton, FL March 2006 2,500
Houston Houston, TX February 2002 3,600
Liberty Street New York, NY September 2003 5,306
University Blvd. Orlando, FL July 2012 3,032
Winter Park Orlando, FL March 2014 3,200
(1) Lease currently being renegotiated.
(2) Lease expired May 31, 2000.
Leases for Nathan's restaurants typically provide for a base rental plus
real estate taxes, insurance and other expenses and, in some cases, provide for
an additional percentage rent based on the restaurants' revenues. Many of the
Nathan's leases also provide for renewal options ranging between 5 - 25 years
upon expiration of the prime lease. We closed our original Nathan's location in
the Paramus Park Shopping Center on March 25, 2000 and are currently negotiating
a lease for a new Nathan's location within the mall. We closed our Nathan's
restaurant in the Woodbridge Mall on May 31, 2000 due to the expiration of the
lease.
We assumed the leases for the two properties operated by Kenny Rogers
Roasters from the previous restaurant operator. These leases have remaining
terms of 13 and 18 years and also provide for a base rental plus real estate
taxes, insurance and other expenses.
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Properties leased by Miami Subs restaurants generally provide for an
initial lease term of up to 20 years and renewal terms of five to 20 years. The
leases generally provide for fixed rentals plus adjustments based on changes in
the consumer price index or percentage rentals on gross sales. Restaurants and
other facilities are leased or sub-leased to franchisees or others on terms
which are generally similar to the terms in our lease with the third-party
landlord, except that in certain cases the rent has been increased. We remain
liable for all lease costs when properties are sub-leased to franchisees or
others. At March 26, 2000, we were the sublessor to 52 properties pursuant to
these arrangements. Not included in the above table are eight properties we
leased which were closed as of March 26, 2000. We are attempting to terminate
these leases or sublease the properties to third parties. Two company-operated
Miami Subs restaurants and 14 of the restaurants leased/sub-leased to
franchisees or others are located outside of Florida.
Aggregate rental expense, net of sublease income, under all current leases
amounted to $2,848,000 in fiscal 2000.
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are from time to time involved in ordinary and
routine litigation. We are also involved in the following litigation:
In or about December, 1996, Nathan's Famous Systems, Inc. instituted an
action in the Supreme Court of New York, Nassau County, against Phylli Foods,
Inc. a franchisee, and Calvin Danzig as a guarantor of Foods' payment and
performance obligations, to recover royalty fees and advertising contributions
due to Systems in the aggregate amount of $35,567.20 under a franchise agreement
between Systems and Phylli Foods dated June 1, 1994. In their answer, the
defendants essentially denied the material allegations of the complaint and
interposed counterclaims against Systems in which they alleged essentially that
Systems fraudulently induced the defendants to purchase the franchise from
Systems or did so by means of negligent misrepresentations. Defendants also
alleged that by reason of Systems' allegedly fraudulent and deceitful conduct,
Systems violated the General Business Law of New York. As a consequence of the
foregoing, the defendants are seeking damages in excess of five million dollars,
as well as statutory relief under the General Business Law. Systems has moved to
dismiss the counterclaims on the grounds that they are insufficiently pleaded
and otherwise fail to state a sustainable claim against Systems upon which
relief may be granted. During fiscal 1998, Systems' motion was granted except
for the claim seeking statutory relief under the General Business Law.
Nathan's was named as one of three defendants in an action commenced in
June 1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages in
an amount exceeding $5 million against the landlord, one of Nathan's franchisees
and Nathan's claiming that the operation of a restaurant in a building in Long
Island City created noxious and offensive fumes and odors that allegedly were
injurious to the health of the plaintiff and his employees and patients, and
interfered with, and irreparably damaged his practice. Plaintiff also claims
that the landlord fraudulently induced him to enter a lease extension by
representing that the first floor of the building would be occupied by a
non-food establishment. Nathan's believes that there is no merit to the
plaintiff's claims against it inasmuch as it never was a party to the lease, and
the restaurant, which closed in or about August 1995, was operated by a
franchisee exclusively. Nathan's intends to defend the action vigorously.
On January 5, 1999, Miami Subs was served with a class action lawsuit
entitled Robert J. Feeney, on behalf of himself and all others similarly
situated vs. Miami Subs Corporation, et al., in Broward County Circuit Court,
which was filed against Miami Subs, its directors and Nathan's in a Florida
state court by a shareholder of Miami Subs. Subsequently, Nathan's and its
designees to the Miami Subs Board were also served. The suit alleged that the
proposed merger between Miami Subs and Nathan's, as contemplated by the
companies' non-binding letter of intent, was unfair to Miami Subs' shareholders
and constituted a breach by the defendants of their fiduciary duties to the
shareholders of Miami Subs. The plaintiff sought among other things: 1. class
action status; 2. preliminary and permanent injunctive relief against
consummation of the proposed merger; and 3. unspecified damages to be awarded to
the shareholders of Miami Subs.
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On April 7, 2000 the plaintiff filed his dismissal without prejudice of
the action, effectively ending the case against all of the defendants
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICES
Our common stock began trading on the over-the-counter market on February
26, 1993 and is quoted on the Nasdaq National Market System ("Nasdaq") under the
symbol "NATH." The following table sets forth the high and low closing share
prices per share for the periods indicated:
High Low
- ---------------------------------------------------------------------------------------------
Fiscal year ended March 28, 1999
First quarter $ 4.44 $ 3.69
Second quarter 4.63 3.44
Third quarter 4.44 3.34
Fourth quarter 4.28 3.56
Fiscal year ended March 26, 2000
First quarter $ 4.19 $ 3.50
Second quarter 3.69 3.13
Third quarter 3.66 3.16
Fourth quarter 4.75 3.06
At June 6, 2000 the closing price per share for our common stock, as reported
by Nasdaq was $3.0625
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock since our
initial public offering. It is our Board of Directors' policy to retain all
available funds to finance the development and growth of our business. The
payment of cash dividends in the future will be dependent upon our earnings and
financial requirements.
SHAREHOLDERS
As of June 6, 2000, we had 840 shareholders of record, excluding
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in "street name" for their customers.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEARS ENDED
MARCH 26, MARCH 28, MARCH 29, MARCH 30, MARCH 31
2000 1999 1998 1997 1996(1)
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues:
Sales $30,463 $24,511 $23,530 $21,718 $21,167
Franchise fees and royalties 5,906 3,230 3,062 3,238 3,249
License royalties and other income 2,159 1,841 2,285 1,619 2,025
--------------------------------------------------------------------------------
Total revenues 38,528 29,582 28,877 26,575 26,441
--------------------------------------------------------------------------------
Costs and Expenses:
Cost of sales 19,614 15,367 14,468 13,031 12,833
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Restaurant operating expenses 8,208 5,780 6,411 6,602 6,730
Depreciation and amortization 1,358 1,065 1,035 1,013 1,724
Amortization of intangible assets 716 384 384 406 665
General and administrative expenses 8,222 4,722 4,755 4,097 5,457
Interest expense 198 1 6 16 28
Impairment of long-lived assets 465 302 --- --- 3,907
Impairment of notes receivable 840 --- --- --- --
Other expense (income) 427 (349) --- --- 1,570
--------------------------------------------------------------------------------
Total costs and expenses 40,048 27,272 27,059 25,165 32,914
--------------------------------------------------------------------------------
(Loss) income before (benefit) provision
for income taxes (1,520) 2,310 1,818 1,410 (6,473)
(Benefit) provision for income taxes (250) (418) 290 622 (49)
--------------------------------------------------------------------------------
Net (loss) income ($1,270) $2,728 $1,528 $788 ($6,379)
================================================================================
Per Share Data:
Net (loss) income
Basic ($0.22) $0.58 $0.32 $0.17 ($1.35)
Diluted ($0.22) $0.57 $0.32 $0.17 ($1.35)
Dividends ---- ---- ---- ---- ----
Number of common shares used in computing
net (loss) income per share
Basic 5,881 4,722 4,722 4,722 4,722
Diluted 5,881 4,753 4,749 4,729 4,722
Balance Sheet Data at End of Fiscal Year:
Working capital (deficit) ($ 322) $ 3,708 $ 6,105 $ 4,802 $ 3,937
Total assets 48,583 31,250 29,539 27,794 27,765
Long term debt, net of current maturities 3,131 0 9 21 35
Stockholders' equity $ 33,347 $26,348 $23,586 $21,976 $21,142
--------------------------------------------------------------------------------
Selected Restaurant Operating Data:
Systemwide Restaurant Sales:
Company-owned $ 27,478 $21,981 $22,332 $21,718 $21,167
Franchised 152,627 64,178 58,802 63,564 68,009
--------------------------------------------------------------------------------
Total $180,105 $86,159 $81,134 $85,282 $89,176
================================================================================
Number of Units Open at End of Fiscal Year:
Company-owned 32 25 27 26 27
Franchised 415 163 156 147 178
--------------------------------------------------------------------------------
Total 447 188 183 173 205
================================================================================
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Notes to Selected Financial Data
(1) Our fiscal year ends on the last Sunday in March which results in a 52
or 53 week year. Fiscal 1996 was a 53 week year.
(2) Common stock equivalents have been excluded from the computation for
the years ended March 26, 2000 and March 31, 1996 as the impact of
their inclusion would have been anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
During the current fiscal year ended March 26, 2000, we completed two
acquisitions that provided us with two highly recognized brands. On April 1,
1999, we became the franchisor of the Kenny Rogers Roasters restaurant system by
acquiring the intellectual property rights, including trademarks, recipes and
franchise agreements of Roasters Corp. and Roasters Franchise Corp. On September
30, 1999, we acquired the remaining 70% of the outstanding common stock of Miami
Subs Corporation we did not already own. Our revenues are generated primarily
from operating company-owned restaurants and restaurant franchising under the
Nathan's, Kenny Rogers and Miami Subs brands, licensing agreements for the sale
of Nathan's products within supermarkets and selling products under Nathan's
Branded Product Program. The Branded Product Program enables foodservice
operators to offer Nathans' hot dogs and other proprietary items for sale within
their facilities. In conjunction with this program, foodservice operators are
granted a limited use of the Nathans' trademark with respect to the sale of hot
dogs and certain other proprietary food items and paper goods.
At March 26, 2000, our combined systems consisted of 32 company-owned
units, 415 franchised or licensed units in addition to over 1,000 Nathan's
Branded Product points of distribution that feature Nathan's world famous
all-beef hot dogs, located in forty-four states, the District of Columbia and
sixteen foreign countries. At March 26, 2000, our company-owned restaurant
system included 19 Nathan's units, 11 Miami Subs units and 2 Kenny Rogers
Roasters units, as compared to 25 Nathan's units at March 28, 1999.
In connection with our acquisition of Miami Subs, we are in the process of
closing up to 18 underperforming restaurants, including up to five
company-operated restaurants.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 26, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 28, 1999
Revenues
Total sales were $30,463,000 for the fifty-two weeks ended March 26, 2000
("the fiscal 2000 period") as compared to $24,511,000 for the fifty-two weeks
ended March 28, 1999 ("the fiscal 1999 period"). Of the total increase, sales
increased by $6,985,000 as a result of the acquisitions made this year.
Company-owned restaurant sales of the Nathan's brand decreased 6.0% or
$1,318,000 to $20,664,000 from $21,982,000. This restaurant sales decline is
primarily due to the impact of franchising three company-owned restaurants and
closing three other unprofitable company-owned restaurants during the current
fiscal year and closing two company-owned units during the prior fiscal year due
to the lease expirations. The total sales decline during the fiscal 2000 period
attributable to these 8 stores was $1,763,000. Comparable restaurant sales of
the Nathan's brand increased by 1.1% versus the fiscal 1999 period. We continued
to emphasize local store marketing activities, new product introductions and
value pricing strategies for the Nathan's brand. These activities were
supplemented by a regional newsprint campaign during the summer of 1999.
Pursuant to our exclusive co-branding agreement with Arthur Treachers, we began
test marketing Arthur Treachers signature products in four company-owned
Nathan's restaurants during September and October 1999. Based upon the success
of these tests, we have extended these co-branding efforts within company-owned
units and have made Arthur Treachers products available to franchisees. At June
15, 2000 Arthur Treachers' products were featured in 14 Nathan's restaurants.
Sales from the Branded Product Program increased by 18.0% to $2,985,000 during
the fiscal 2000 period as compared to sales of $2,530,000 in the fiscal 1999
period.
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Franchise fees and royalties increased by 82.8% or $2,676,000 to
$5,906,000 in the fiscal 2000 period compared to $3,230,000 in the fiscal 1999
period. Increases in franchise income resulting from the acquisitions made
during the fiscal 2000 period were $2,685,000. Nathans' franchise royalties
increased by $60,000 or 2.2% to $2,758,000 in the fiscal 2000 period as compared
to $2,698,000 in the fiscal 1999 period. Franchise restaurant sales of the
Nathan's brand increased by 2.0% to $65,458,000 in the fiscal 2000 period as
compared to $64,178,000 in the fiscal 1999 period. At March 26, 2000, there were
415 franchised or licensed restaurants within the franchise system, including
160 Nathan's locations. Franchise fee income derived from Nathan's restaurant
openings was $463,000 in the fiscal 2000 period as compared to $532,000 in the
fiscal 1999 period. This decrease was primarily attributable to the difference
between the number and types of franchised units opened between the two periods.
During the fiscal 2000 period, twenty-one new Nathan's franchised or licensed
units opened, including two units in Egypt.
License royalties were $1,722,000 in the fiscal 2000 period as compared
to $1,415,000 in the fiscal 1999 period. Increases in license royalties
resulting from the acquisitions made during the fiscal 2000 period were $86,000.
The majority of the remaining increase is attributable to sales by SMG, Inc.,
our licensee for the sale of Nathan's frankfurters within supermarkets and club
stores.
Equity in (losses) earnings of unconsolidated affiliate of ($163,000),
represents our proportionate share of Miami Subs' net loss for the period March
1, 1999 through the date of the merger on September 30, 1999. Included in Miami
Subs' net loss for that period were merger costs of $325,000.
Investment and other income was $600,000 in the fiscal 2000 period
versus $400,000 in the fiscal 1999 period. Increased other income attributable
to the acquisitions made during the fiscal 2000 period were $308,000. During the
fiscal 2000 period our marketable investment securities earned approximately
$132,000 more than the prior fiscal year. This was due to earning less interest
income than the fiscal 1999 period due primarily to the reduced amount of its
fixed income securities which was more than offset by the difference in
performance of the equity markets between the two periods. Additionally, we
earned approximately $118,000 less miscellaneous income during the fiscal 2000
period as compared to the fiscal 1999 period and recognized a loss of
approximately $123,000 on the disposal of fixed assets.
Costs and Expenses
Cost of sales increased by $4,247,000 from $15,367,000 in the fiscal
1999 period to $19,614,000 in the fiscal 2000 period. Of the total increase,
cost of sales increased by $4,831,000 as a result of the acquisitions made
during the fiscal 2000 period. Lower costs of approximately $45,000 were
incurred in connection with the Nathan's Branded Product Program. Restaurant
cost of sales associated with the Nathan's brand were lower due primarily to the
closure of two company-owned Nathan's restaurants during the fiscal 1999 period,
the closure of three unprofitable company-owned Nathan's restaurants during the
fiscal 2000 period and the franchising of three company-owned Nathan's units
during the fiscal 2000 period which were partly offset by the exclusion of costs
of operating the Nathan's Kings Plaza restaurant which was being renovated
during fiscal 1999. Our cost of restaurant sales for the Nathan's brand was
60.5% of restaurant sales in the fiscal 2000 period as compared to 61.0% of
restaurant sales in the fiscal 1999 period. The decrease, as a percentage of
restaurant sales, is due partly to the increase in the amount of the average
check over the prior period and lower costs of food and labor as a percentage of
restaurant sales during the fiscal 2000 period. We continue to seek to operate
more efficiently as a means to minimize the margin pressures which have become
an integral part of competing in the current value conscious marketplace.
Restaurant operating expenses increased by $2,428,000 from $5,780,000
in the fiscal 1999 period to $8,208,000 in the fiscal 2000 period. Of the total
increase, restaurant operating expenses increased by $2,366,000 as a result of
the acquisitions made this year. Restaurant operating expenses associated with
the Nathan's brand were $5,842,000 during the fiscal 2000 period versus
$5,780,000 during the fiscal 1999 period. This increase in restaurant operating
costs was due primarily to higher costs of operating the restaurant that was
renovated last year of approximately $146,000, higher occupancy costs of
approximately $107,000, higher insurance costs of approximately $68,000 and
higher marketing costs of approximately $138,000, which were partly offset by
lower costs due to operating fewer company-owned restaurants of approximately
$430,000.
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Depreciation and amortization increased by $293,000 from $1,065,000 in
the fiscal 1999 period to $1,358,000 in the fiscal 2000 period. Depreciation
expense increased as a result of the acquisitions made during the fiscal 2000
period by $323,000.
Amortization of intangible assets increased by $332,000 from $384,000
in the fiscal 1999 period to $716,000 in the fiscal 2000 period. This increase
is due to the amortization, based upon the preliminary purchase price
allocations, of the Kenny Rogers Roasters intellectual property acquired on
April 1, 1999 and the Miami Subs acquisition on September 30, 1999.
General and administrative expenses increased by $3,500,000 to $8,222,000
in the fiscal 2000 period as compared to $4,722,000 in the fiscal 1999 period.
Of the total increase, general and administrative expenses increased by
$2,692,000 as a result of the acquisitions made during the fiscal 2000 period.
General and administrative expenses, excluding the impact of Miami Subs and
Kenny Rogers Roasters, increased by $808,000 or 17.1% primarily due to increased
compensation expense of $339,000, increased provisions for doubtful accounts of
approximately $262,000, higher professional fees for legal, audit and tax
services of approximately $148,000 and approximately $76,000 associated with
costs in connection with the migration of the Miami Subs support functions to
New York which commenced effective March 27, 2000.
Interest expense of $198,000 primarily relates to assumed indebtedness
as of the date of the acquisition. Since the acquisition, we have repaid notes
totaling approximately $1,929,000 and therefore anticipate lower interest
expense in the future.
Impairment charges on notes receivable of $840,000, reflects write-down
pursuant to SFAS No.114 - "Accounting by Creditors for Impairment of a Loan", on
six notes receivable.
Impairment charges on fixed assets of $465,000 during the fiscal 2000
period and $302,000 during the fiscal 1999 period reflect valuation allowances
pursuant to SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of"" relating to three under-performing
stores in the fiscal 2000 period and four under-performing stores in the fiscal
1999 period.
Other expense (income) of $427,000 during the fiscal 2000 period
includes approximately $191,000 of ongoing lease expenses of units that were
operating during the period that are part of the plan to be closed and $236,000
in connection with the satisfaction of certain financial guarantees, compared
to the prior fiscal year when we reversed previous litigation accruals
in the amount of $349,000 resulting from the conclusion of the associated
litigation.
Income Taxes
In the fiscal 2000 period, the income tax benefit was ($250,000) or(16.4%)
of loss before income taxes as compared to the income tax benefit of ($418,000)
or (18.1%) of income before taxes in the fiscal 1999 period. During fiscal 1999
management determined that, based upon the facts and circumstances at the time,
it was more likely than not that a portion of our deferred tax assets would be
realized. Accordingly, we reduced our valuation allowance by $1,443,000 in
fiscal 1999. The fiscal 1999 provision before adjustment for the valuation
allowance was $1,025,000 or 44.4% of income before taxes. Management will
continue to monitor the likelihood of continued realizability of its deferred
tax asset and may, if deemed appropriate under the facts and circumstances at
that time, recognize further adjustments to our deferred tax valuation allowance
in accordance with Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes".
FISCAL YEAR ENDED MARCH 28, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 29,1998
Revenues
Total sales increased 4.2% or $981,000 to $24,511,000 for the fifty-two
weeks ended March 28, 1999 ("fiscal 1999") from $23,530,000 for the fifty-two
weeks ended March 29, 1998 ("fiscal 1998"). Sales from the Branded Product
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Program, which was first introduced in fiscal 1998, increased by $1,331,000 or
111% to $2,529,000 for fiscal 1999 as compared to $1,198,000 for fiscal 1998.
Company-owned restaurant sales decreased 1.6% or $350,000 to $21,982,000 from
$22,332,000. During fiscal 1999, we were forced to close two of our restaurants
which had previously been operating under month-to-month leases, resulting in a
sales decline of approximately $734,000 versus the prior year. Comparable unit
sales increased by approximately 1.3% in fiscal 1999 versus fiscal 1998.
Comparable unit sales are based on units operating for 18 months or longer as of
the beginning of the fiscal year. We continue to emphasize local store marketing
activities, new product introductions and value pricing strategies. These
activities were supplemented with a radio and billboard campaign during the
summer 1998. During fiscal 1999, we completed the renovation of our 86th Street
restaurant in Brooklyn, NY, which included a drive- thru operation, and our
restaurant in the Kings Plaza Shopping Center. Plans are currently being
considered to renovate and modernize the appearance and design of certain other
company-owned units. At March 28, 1999 and March 29, 1998, there were 25 and 27
company-owned Nathan's units, respectively.
Franchise fees and royalties increased by $168,000 or 5.5% to $3,230,000
in fiscal 1999 compared to $3,062,000 in fiscal 1998. Franchise royalties
increased by $209,000 or 8.4% to $2,698,000 in fiscal 1999 as compared to
$2,489,000 in fiscal 1998. Franchise restaurant sales, upon which royalties are
based, increased by 9.1% or $5,376,000, to $64,178,000 in fiscal 1999, compared
to $58,802,000 in fiscal 1998. The majority of the sales increase can be
attributed to the additional franchised and licensed units operating during
fiscal 1999. Franchise fee income was $532,000 in fiscal 1999, compared to
$573,000 in fiscal 1998 due primarily to the difference in the amount of
forfeitures and expirations recognized into income between the two years. During
fiscal 1999, 21 new franchised or licensed units opened, including the second
restaurant in Israel, and the first Kosher Nathan's restaurant in Brooklyn, New
York. We also executed an agreement for international development within Egypt.
At March 28, 1999, there were 163 franchised or licensed restaurants as compared
to 156 at March 29, 1998.
License royalties decreased by $80,000 or 5.4% to $1,415,000 in fiscal
1999, compared to $1,495,000 in fiscal 1998. During fiscal 1999, we earned
royalties of approximately $137,000 under a new license agreement for the sale
of Nathans' home meal replacements in supermarkets. Fiscal 1998 results included
$240,000 of income recognized from amortization of a deferred fee received from
SMG, Inc., which was fully amortized in March 1998.
Investment and other income was $400,000 in fiscal 1999 versus $790,000 in
fiscal 1998. Approximately $263,000 of the decrease is the result of lower
earnings on our marketable investment securities resulting from the difference
in the performance of the financial markets between the two years, the impact of
the fiscal 1998 shift into tax exempt securities and lower investment earnings
from the reduced principle amount of marketable investment securities after we
made our equity investment in Miami Subs Corp. During fiscal 1998, we also
recognized a gain of approximately $130,000 from the sale of an underperforming
restaurant.
Costs and Expenses
Cost of sales increased by $899,000 from $14,468,000 in fiscal 1998 to
$15,367,000 in fiscal 1999. Higher costs were incurred in conjunction with the
growth of the Branded Product Program, the new restaurants opened in the fourth
quarter fiscal 1998 that operated during fiscal 1999 and the higher costs of
restaurant sales. The cost of restaurant sales was 61.0% of restaurant sales in
fiscal 1999 as compared to 60.5% of restaurant sales in fiscal 1998. This
increase is due primarily to higher food costs associated with our ongoing
promotional activities and an increase in labor costs of 0.6% of restaurant
sales due primarily to the impact of the minimum wage increase which took effect
in September 1997. We continue to seek to operate more efficiently and expects
to seek selective price adjustments wherever available to minimize the margin
pressures which have become an integral part of competing in the current value
conscious marketplace.
Restaurant operating expenses decreased by $631,000 from $6,411,000 in
fiscal 1998 to $5,780,000 in fiscal 1999. This decrease can be primarily
attributed to a four month cost hiatus during the renovation of our Kings Plaza
restaurant of approximately $72,000, reduced costs of property taxes arising
from successful tax certiorari proceedings of approximately $100,000, lower
insurance costs of approximately $106,000, lower utility costs of approximately
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$128,000 due primarily to reduced electric rates on Long Island and the impact
of restaurants closed and other lower expenses resulting from the different
restaurants operated between the two periods. As a percentage of restaurant
sales, restaurant operating expenses were 26.3% in fiscal 1999 as compared to
28.4% in fiscal 1998.
Depreciation and amortization increased by $30,000 or 2.9% from $1,035,000
in fiscal 1998 to $1,065,000 in fiscal 1999. Amortization of intangibles was
$384,000 in fiscal 1999 as compared to $384,000 in fiscal 1998.
General and administrative expenses decreased by $33,000 to $4,722,000 in
fiscal 1999, compared to $4,755,000 in fiscal 1998. We incurred lower general &
administrative expenses for professional fees of $236,000 and lower bad debts of
approximately $36,000. Offsetting these savings were increases of approximately
$133,000 relating to salaries for additional personnel primarily to support new
growth initiatives, $42,000 relating to international development efforts and
$82,000 associated with management incentive plans based upon the achievement of
predetermined financial targets.
Impairment charge on long lived assets of $302,000 is associated with
four underperforming stores pursuant to Statement of Financial Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of".
Other expense (income) reflects the reversal of previous litigation
accruals in the amount of ($349,000) resulting from the conclusion of the
associated litigation.
Income Taxes
In fiscal 1999, the income tax benefit was ($418,000) or (18.1%) of income
before taxes as compared to a provision of $290,000 in fiscal 1998. For each
fiscal year we reduced our valuation allowance because management determined
that, based upon the facts and circumstances at the time, it was more likely
than not that a portion of its deferred tax assets would be realized.
Accordingly, we reduced our valuation allowance by $1,443,000 in fiscal 1999 as
compared to $523,000 in fiscal 1998 .The fiscal 1999 provision before adjustment
for the valuation allowance was $1,025,000 or 44.4% of income before taxes as
compared to the fiscal 1998 provision before adjustment for the valuation
allowance of $814,000 or 44.8% of income before taxes. Management will continue
to monitor the likelihood of continued realizability of our deferred tax asset
and may, if deemed appropriate under the facts and circumstances at that time,
recognize further adjustments to our deferred tax valuation allowance in
accordance with Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes".
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 26, 2000 aggregated $2,397,000,
increasing by $232,000 during the fiscal 2000 period. At March 26, 2000,
marketable securities and investment in limited partnership totalled $2,997,000
and the working capital deficit was $322,000 at March 26, 2000.
Cash provided by operations of $1,977,000 in the fiscal 2000 period is
primarily attributable to net loss of $1,270,000, non-cash charges of
$4,560,000, including depreciation and amortization of $2,074,000, impairment
charges on notes receivable and long lived assets of $1,305,000, allowance for
doubtful accounts of $895,000, equity in loss of unconsolidated affiliate of
$163,000 and loss on disposal of fixed assets of $123,000. Other changes within
the operating accounts, net of the assets and liabilities purchased in the
merger, were decreases in marketable investment securities of $270,000, an
increase in notes and accounts receivables of $504,000, an increase in prepaid
expenses and other current assets of $187,000, a decrease in other assets of
$182,000, decreases in accounts payable and accrued expenses of $158,000, a
decrease in other noncurrent liabilities of $682,000 and an increase in deferred
franchise fees and other revenue of $721,000.
Cash provided by investing activities of $184,000 includes cash acquired
in connection with the Miami Subs merger of $3,429,000, net of acquisition costs
and payments received on notes receivable of $320,000. Cash used in investing
activities was $1,590,000 for the acquisition of the intellectual property of
the Kenny Rogers Roasters restaurant system, including expenses and $1,975,000
primarily relating to our acquisition of two Kenny Rogers Roasters
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restaurants and capital improvements of company-owned restaurants and other
fixed asset additions. We plan to invest approximately $600,000 renovating the
two recently acquired Kenny Rogers Roasters restaurants.
Cash used in financing activities of $1,929,000 represents repayments of
assumed Miami Subs notes payable and capitalized lease obligations. We
anticipate that we may further reduce the amount of Miami Subs notes payable in
the future.
In connection with the acquisition of Miami Subs, we are in the process of
closing up to 18 underperforming Miami Subs restaurants. Accordingly, we expect
to incur future cash payments, consisting primarily of future lease payments
including costs and expenses associated with terminating such leases. At present
we have accrued $660,000 of lease termination costs, however, we are unable to
reasonably estimate these final costs. At March 26, 2000, the minimum annual
lease payments for the affected stores where no termination cost has been
accrued was $1,322,000, with remaining lease terms ranging from 2 years up to
approximately 18 years.
We expect that we will reinvest in certain existing restaurants in the
future and that we will fund those investments from our operating cash flow. We
do not currently expect to incur significant capital expenditures to develop new
company-owned restaurants, which would require debt or equity financing.
Although we had a working capital deficit of $322,000 at March 26, 2000,
we believe that available cash, marketable securities and investment in limited
partnership and internally generated funds should provide sufficient capital to
finance our operations through fiscal 2001. We maintain a $5,000,000 uncommitted
bank line of credit and have not borrowed any funds to date under this line of
credit.
SEASONALITY
Our business is affected by seasonal fluctuations, the effects of weather
and economic conditions. Historically, sales and earnings have been highest
during our first two fiscal quarters with the fourth fiscal quarter representing
the slowest period. This seasonality is primarily attributable to weather
conditions in our marketplace for our company-owned Nathan's stores, which is
principally the New York metropolitan area. Miami Subs' restaurant sales have
historically been strongest the period March through August, which approximates
our first and second quarters, as a result of a heavy concentration of
restaurants being located in Florida. As a result, we believe that future
revenues may become slightly more seasonal.
IMPACT OF INFLATION
During the past several years our commodity costs have remained relatively
stable. As such, we believe that inflation has not materially impacted earnings.
Substantial increases in labor, food and other operating expenses could
adversely affect our operations and those of the restaurant industry. In 1996,
legislation was enacted which increased the Federal minimum wage, from $4.25 per
hour to $4.75 on October 1, 1996 with another increase to $5.15 on September 1,
1997. We experienced higher labor costs on a relatively small proportion of our
workforce as a result of the September 1997 increase. Currently, various
legislators are re-examining additional changes to the minimum wage
requirements. At this time, different bills have been passed by the Senate and
the House of Representatives proposing to further increase the Federal minimum
wage, which is expected to go to conference during the summer 2000. We believe
that any further increases in the minimum wage could have a significant
financial impact on us and we might have to reconsider our pricing strategy as a
means to offset any legislated increase to avoid reducing operating margins.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
is effective for all fiscal years beginning after June 15, 2000 and will not
require retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet, measured at fair value. Derivative
instruments will be recognized as gains or losses
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in the period of change. The Company does not expect the adoption of SFAS No.
133 to have a material impact on its financial position or results of its
operations as the Company does not presently make use of derivative instruments.
In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101
explains the SEC staff's general framework for recognizing revenue, specific
criteria to be met, along with required disclosures related to revenue
recognition.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report are forward-looking
statements. Forward-looking statements represent our judgment regarding future
events. Although we would not make forward-looking statements unless we believe
we have a reasonable basis for doing so, we cannot guarantee their accuracy and
actual results may differ materially from those we anticipated due to a number
of uncertainties, many of which we are not aware. These risks and uncertainties,
many of which are not within our control, include, but are not limited to:
economic, weather, legislative and business conditions; the availability of
suitable restaurant sites on reasonable rental terms; changes in consumer
tastes; ability to continue to attract franchisees; the ability to purchase its
primary food and paper products at reasonable prices; no material increases in
the minimum wage; and our ability to attract competent restaurant and managerial
personnel. We generally identify forward-looking statements with the words
"believe", "intend," "plan," "expect," "anticipate," "estimate," "will,"
"should" and similar expressions.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We have historically invested our cash and cash equivalents in short
term, fixed rate, highly rated and highly liquid instruments which are
reinvested when they mature throughout the year. Although our existing
investments are not considered at risk with respect to changes in interest
rates or markets for these instruments, our rate of return on short-term
investments could be affected at the time or reinvestment as a result of
intervening events.
We have invested our marketable investment securities in intermediate
term, fixed rate, highly rated and highly liquid instruments and a highly
liquid investment limited partnership that invests principally in equities.
These investments are subject to fluctuations in interest rates and the
performance of the equity markets.
The interest rate on our borrowings are generally determined based upon
prime rate and may be subject to market fluctuation as the prime rate changes
as determined within each specific agreement. We do not anticipate entering
into interest rate swaps or other financial instruments to hedge our borrowings.
The cost of commodities are subject to market fluctuation. We have not
attempted to hedge against fluctuations in the prices of the commodities we
purchase using future, forward, option or other instruments. As a result, our
future commodities purchases are subject to changes in the prices of such
commodities.
Foreign franchisees generally conduct business with us and make payments
in, United States dollars, reducing the risks inherent with changes in the
values of foreign currencies. As a result, we have not purchased future
contracts, options or other instruments to hedge against changes in values of
foreign currencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data is submitted
as a separate section of this report beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to the Regulation 14A, not later than 120 days after the end
of the fiscal year covered by this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated herein
by reference to our proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.
28
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying index
to consolidated financial statements and schedule on Page F-1 are filed as part
of this report.
(2) FINANCIAL STATEMENT SCHEDULE
The consolidated financial statement schedule listed in the accompanying
index to consolidated financial statements and schedule on Page F-1 is filed as
part of this report.
(3) EXHIBITS
Certain of the following exhibits (as indicated in the footnotes to the
list), were previously filed as exhibits to other reports or registration
statements filed by the Registrant under the Securities Act of 1993 or under the
Securities Exchange Act of 1934 and are herein incorporated by reference.
Exhibit
No. Exhibit
- ------- -------
3.1 Certificate of Incorporation.(Incorporated by reference to Exhibit 3.1 to Registration Statement on Form
S-1 No. 33-56976.)
3.2 Amendment to the Certificate of Incorporation, filed December 15, 1992.(Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-1 No. 33-56976.)
3.3 By-Laws, as amended. (Incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K for
the fiscal year ended March 28, 1999.)
4.1 Specimen Stock Certificate.(Incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-1 No. 33-56976.)
4.2 Form of Warrant issued to Ladenburg, Thalmann & Co., Inc. (Incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-1 No. 33-56976.)
4.3 Form of Warrant issued to Howard M. Lorber. ( Incorporated by reference to Exhibit 4.3 to the Annual
Report filed on form 10-K for the fiscal year ended March 27, 1994.)
4.4 Amendment to Warrant issued to Howard M. Lorber (Incorporated by reference to Exhibit 4.4 to the
Annual Report filed on form 10-K for the fiscal year ended March 31, 1996.)
4.5 Specimen Rights Certificate (Incorporated by reference to Exhibit 4 to the Current Report on form 8-K
dated July 14, 1995.)
10.1 Employment Agreement with Wayne Norbitz, dated December 28, 1992. (Incorporated by reference to Exhibit
10.1 to Registration Statement on Form S-1 No. 33-56976.)
10.2 Leases for premises at Coney Island, New York, as follows: (Incorporated by reference Exhibit 10.3 to
Registration Statement on Form S-1 No. 33-56976.)
a) Lease, dated November 22, 1967, between Nathan's Realty Associates and the Company.
b) Lease, dated November 22, 1967, between Ida's Realty Associates and the Company.
c) Lease, dated November 17, 1967, between Ida's Realty Associates and the Company.
10.3 Leases for the premises at Yonkers, New York, as follows: (Incorporated by reference to Exhibit 10.4 to
Registration Statement on Form S-1 No. 33-56976.)
a) Lease Modification of Land and Building Lease between the Yonkers Corp. and the Company,
dated November 19, 1980;
b) Lease Modification of Land and Building Lease between 787 Central Park Avenue, Inc., and the
Company dated May 1, 1980.
10.4 Lease with NWCM Corp. for premises at Oceanside, New York, dated March 14, 1975. (Incorporated by
reference to Exhibit 10.5 to Registration Statement on Form S-1 No. 33-56976.)
29
31
Exhibit
No. Exhibit
- ------- -------
10.5 1992 Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.8 to Registration Statement
on Form S-8 No. 33-93396.)
10.6 Area Development Agreement with Marriott Corporation, dated February 19, 1993. (Incorporated by
reference to Exhibit 10.9(a) to the Annual Report on Form 10-K for the fiscal year ended March 28, 1993.)
10.7 Area Development Agreement with Premiere Foods, dated September 11, 1990. (Incorporated by reference
to Exhibit 10.10 to Registration Statement on Form S-1 No. 33-56976.)
10.8 Form of Standard Franchise Agreement. (Incorporated by reference to Exhibit 10.12 to Registration Statement on Form S-1
No. 33-56976.)
10.9 401K Plan and Trust. (Incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1
No. 33-56976.)
10.10 Amendment dated November 8, 1993, to the Employment Agreement, dated December 28, 1992, with
Wayne Norbitz. ( Incorporated by reference to Exhibit 10.19 to the Annual Report filed on form 10-K for
the fiscal year ended March 27, 1994.)
10.11 License Agreement dated as of February 28, 1994, among Nathan's Famous Systems, Inc. and SMG, Inc.,
including amendments and waivers thereto. ( Incorporated by reference to Exhibit 10.21 to the Annual
Report filed on form 10-K for the fiscal year ended March 27, 1994.)
10.12 Outside Director Stock Option Plan. (Incorporated by reference to Exhibit 10.22 to Registration Statement
on Form S-8 No. 33-89442.)
10.13 Home Depot Food Service Lease Agreement. (Incorporated by reference to Exhibit 10.24 to the Annual
Report filed on form 10-K for the fiscal year ended March 26, 1995.)
10.14 Modification Agreement to the Employment Agreement with Wayne Norbitz, dated December 28, 1992.
(Incorporated by reference to Exhibit 10.1 to the Quarterly Report filed on form 10-Q for the fiscal
quarter ended December 29, 1996.)
10.15 Amendment to License Agreement dated as of February 28, 1994, among Nathan's Famous Systems, Inc.
and SMG, Inc. including waivers and amendments thereto. (Incorporated by reference to Exhibit 10.2
to the Quarterly Report filed on form 10-Q for the fiscal quarter ended December 29, 1996.)
10.16 Warrant Agreement dated November 24, 1996 between the Company and Jerry Krevans. (Incorporated by
reference to Exhibit 10.24 to the Annual Report filed on form 10-K for the fiscal year ended March 30,
1997.)
10.17 Second Amended and Restated Rights Agreement dated as of April 6, 1998 between Nathan's Famous, Inc.
and American Stock Transfer and Trust Company (Incorporated by reference to Exhibit 2 to Form 8-A/A
dated April 6, 1998.)
10.18 1998 Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to the Annual Report filed on form
10-K for the fiscal year ended March 29, 1998.)
10.19 North Fork Bank Promissory Note.(Incorporated by reference to Exhibit 10.21 to the Annual Report filed
on form 10-K for the fiscal year ended March 28, 1999.)
10.20 Amended and Restated Employment Agreement with Donald L. Perlyn effective September 30, 1999.
10.21 Third Amended and Restated Rights Agreement dated as of December 10, 1999 between Nathan's
Famous, Inc. And American Stock Transfer and Trust Company (Incorporated by reference to Exhibit 2
to Form 8-A/A dated December 10, 1999.
10.22 Employment Agreement dated as of January 31, 2000 with Ronald DeVos.
10.23 Master Distributor Agreement with U.S. Foodservice, Inc..
10.24 Employment Agreement dated as of January 1, 2000 with Howard M. Lorber.
21 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
(b) REPORTS ON FORM 8-K
None.
30
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized on the 23th day of June,
2000. Nathan's Famous, Inc.
/s/ WAYNE NORBITZ
- ----------------------------
Wayne Norbitz, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on the 23th day of June, 2000.
/s/ HOWARD M. LORBER
- ----------------------------
Howard M. Lorber Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ WAYNE NORBITZ President, Chief Operating Officer and
- ---------------------------- Director
Wayne Norbitz
/s/ RONALD G. DEVOS Vice President - Finance and Chief
- ---------------------------- Financial Officer (Principal Financial and
Ronald G. DeVos Accounting Officer)
/s/ DONALD L. PERLYN Executive Vice President and Director
- ----------------------------
Donald L. Perlyn
/s/ ROBERT J. EIDE
- ----------------------------
Robert J. Eide Director
/s/ BARRY LEISTNER
- ----------------------------
Barry Leistner Director
/s/ BRIAN GENSON
- ----------------------------
Brian Genson Director
/s/ A. F. PETROCELLI
- ----------------------------
Attilio F. Petrocelli Director
31
33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statement of Nathan's Famous, Inc. and
subsidiaries are included in item 8:
Financial Statements Page
- -------------------- ----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of March 26, 2000 and March 28, 1999 F-3
Consolidated Statements of Operations for the Fiscal Years
ended March 26, 2000, March 28, 1999 and March 29, 1998 F-4
Consolidated Statements of Stockholder Equity for the Fiscal Years
ended March 26, 2000, March 28, 1999, and March 29, 1998 F-5
Consolidated Statements of Cash Flows for the Fiscal Years ended
March 26, 2000, March 28, 1999 and March 29, 1998 F-6
Notes to the Consolidated Financial Statements F-7
Financial Statement Schedules Page
- ----------------------------- ----
Report of Independent Public Accountants S-1
Schedule II for the Fiscal Years ended March 26, 2000,
March 28, 1999, and March 29, 1998 S-2
F-1
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nathan's Famous, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Nathan's Famous,
Inc., (a Delaware Corporation) and subsidiaries as of March 26, 2000 and March
28, 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three fiscal years in the period ended
March 26, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nathan's Famous, Inc. and
subsidiaries as of March 26, 2000 and March 28, 1999, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 26, 2000 in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
New York, New York
June 21, 2000
F-2
35
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS March 26, 2000 March 28, 1999
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,397 $ 2,165
Marketable securities and investment in limited partnership 2,997 3,267
Notes and accounts receivables, net 2,618 1,578
Inventories 543 374
Prepaid expenses and other current assets 635 411
Deferred income taxes 1,578 622
---------- ----------
Total current assets 10,768 8,417
Notes receivable, net 2,527 --
Property and equipment, net 13,977 6,293
Assets held for sale (Note 3) 945 --
Intangible assets, net 19,092 10,882
Investment in unconsolidated affiliate (Note 9) -- 4,441
Deferred income taxes 711 892
Other assets, net 563 325
---------- ----------
$ 48,583 $ 31,250
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable and capital lease obligations $ 279 $ --
Accounts payable 1,727 1,053
Accrued expenses and other current liabilities 8,398 3,434
Deferred franchise fees 686 222
---------- ----------
Total current liabilities 11,090 4,709
Notes payable and capital lease obligations, less current maturities 3,131 --
Other liabilities 1,015 193
---------- ----------
Total liabilities 15,236 4,902
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000,000 and 20,000,000 shares authorized,
7,040,196 and 4,722,216 issued and outstanding at March 26, 2000 and March
28, 1999, respectively 70 47
Additional paid-in capital 40,669 32,423
Accumulated deficit (7,392) (6,122)
---------- ----------
Total stockholders' equity 33,347 26,348
---------- ----------
$ 48,583 $ 31,250
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
36
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
For the Fiscal Year Ended
-------------------------------------------------------
March 26, 2000 March 28, 1999 March 29, 1998
--------------- -------------- --------------
REVENUES:
Sales $ 30,463 $ 24,511 $ 23,530
Franchise fees and royalties 5,906 3,230 3,062
License royalties 1,722 1,415 1,495
Equity in (losses) earnings of unconsolidated affiliate (163) 26 --
Investment and other income 600 400 790
----------- ----------- -----------
Total revenues 38,528 29,582 28,877
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 19,614 15,367 14,468
Restaurant operating expenses 8,208 5,780 6,411
Depreciation and amortization 1,358 1,065 1,035
Amortization of intangible assets 716 384 384
General and administrative expenses 8,222 4,722 4,755
Interest expense 198 1 6
Impairment charge on notes receivable 840 -- --
Impairment charge on long lived assets 465 302 --
Other expense (income), (Note 12) 427 (349) --
----------- ----------- -----------
Total costs and expenses 40,048 27,272 27,059
----------- ----------- -----------
(Loss) income before (benefit) provision for income taxes (1,520) 2,310 1,818
(Benefit) provision for income taxes (Note 13) (250) (418) 290
----------- ----------- -----------
Net (loss) income $ (1,270) $ 2,728 $ 1,528
=========== =========== ===========
PER SHARE INFORMATION (Note 4):
Net (loss) income per share:
Basic $ (.22) $ .58 $ .32
========== ========== ==========
Diluted $ (.22) $ .57 $ .32
========== ========== ==========
Weighted average shares used in computing net (loss) income:
Basic 5,881 4,722 4,722
=========== =========== ===========
Diluted 5,881 4,753 4,749
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
37
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Additional
Common Common Paid-In
Shares Stock Capital
--------- --------- ---------
BALANCE, March 30, 1997 4,722,216 $ 47 $ 32,388
Amortization of deferred compensation relating to restricted stock -- -- --
Fair value of stock warrants granted to non-employees -- -- 35
Net income -- -- --
--------- --------- ---------
BALANCE, March 29, 1998 4,722,216 47 32,423
Amortization of deferred compensation relating to restricted stock -- -- --
Net income -- -- --
--------- --------- ---------
BALANCE, March 28, 1999 4,722,216 47 32,423
Common stock issued in connection with merger 2,317,980 23 7,367
Warrants issued in connection with merger -- -- 330
Options assumed in connection with merger -- -- 549
Net loss -- -- --
--------- --------- ---------
BALANCE, March 26, 2000 7,040,196 $ 70 $ 40,669
========= ========= =========
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
------------ ----------- ------------
BALANCE, March 30, 1997 $ (81) $ (10,378) $ 21,976
Amortization of deferred compensation relating to restricted stock 47 -- 47
Fair value of stock warrants granted to non-employees -- -- 35
Net income -- 1,528 1,528
--------- --------- ---------
BALANCE, March 29, 1998 (34) (8,850) 23,586
Amortization of deferred compensation relating to restricted stock 34 -- 34
Net income -- 2,728 2,728
--------- --------- ---------
BALANCE, March 28, 1999 -- (6,122) 26,348
Common stock issued in connection with merger -- -- 7,390
Warrants issued in connection with merger -- -- 330
Options assumed in connection with merger -- -- 549
Net loss -- (1,270) (1,270)
--------- --------- ---------
BALANCE, March 26, 2000 $ -- $ (7,392) $ 33,347
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-5
38
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Fiscal Year Ended
---------------------------------------------------
March 26, 2000 March 28, 1999 March 29, 1998
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,270) $ 2,728 $ 1,528
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 1,358 1,065 1,035
Loss on disposal of fixed assets 123 -- --
Impairment of long-lived assets 465 302 --
Impairment of notes receivable 840 -- --
Amortization of intangible assets 716 384 384
Issuance of stock warrants for services received -- -- 35
Provision for doubtful accounts 895 44 80
Amortization of deferred compensation -- 34 47
Gain on sale of restaurant -- -- (130)
Equity in unconsolidated affiliate 163 (26) --
Deferred income taxes (958) (1,036) (63)
Changes in operating assets and liabilities, net of effects from acquisition
of Miami Subs:
Marketable securities and investment in limited partnership 270 5,247 (874)
Notes and accounts receivable (504) (646) (17)
Inventories 3 (18) (143)
Prepaid expenses and other current assets (187) (268) 252
Other assets 182 -- --
Accounts payable, accrued expenses and other current
liabilities (158) (1,177) 296
Deferred franchise fees 721 97 (144)
Other non-current liabilities (682) 50 --
------- ------- -------
Net cash provided by operating activities 1,977 6,780 2,286
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in connection with merger, net of transaction
costs 3,429 -- --
Purchases of property and equipment (1,975) (1,485) (1,740)
Purchase of intellectual property (1,590) -- --
Investment of unconsolidated affiliate -- (4,415) --
Payments received on notes receivable 320 -- --
Proceeds from sale of property and equipment -- -- 130
------- ------- -------
Net cash (used in) provided by investing activities 184 (5,900) (1,610)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayment of borrowings (1,927) -- --
Principal repayments of obligations under capital leases (2) (21) (17)
------- ------- -------
Net cash used in financing activities (1,929) (21) (17)
------- ------- -------
Net change in cash and cash equivalents 232 859 659
CASH AND CASH EQUIVALENTS, beginning of year 2,165 1,306 647
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year $ 2,397 $ 2,165 $ 1,306
======= ======= =======
CASH PAID DURING THE YEAR FOR:
Interest $ 207 $ 1 $ 6
======= ======= =======
Income taxes $ 831 $ 218 $ 421
======= ======= =======
NONCASH FINANCING ACTIVITIES:
Issuance of stock warrants for services received $ -- $ -- $ 35
======= ======= =======
Common stock, warrants and options issued in connection with
acquisition $ 8,269 $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-6
39
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
1. DESCRIPTION AND ORGANIZATION OF BUSINESS
Description of Business
Nathan's Famous, Inc. and Subsidiaries (collectively the "Company" or "Nathans")
has historically operated a chain of retail fast food restaurants featuring
Nathan's famous brand of all beef frankfurters, fresh crinkle-cut french fried
potatoes, and a variety of other menu offerings. Since fiscal 1997, the Company
has supplemented their Nathan's franchise program with their Nathans Branded
Product Program which enables foodservice retailers to sell some of Nathan's
proprietary products outside of the realm of a traditional franchise
relationship. During fiscal 2000, the Company acquired the intellectual property
rights, including trademarks, recipes and franchise agreements of Roasters Corp.
and Roasters Franchise Corp. ("Roasters") the franchisor of Kenny Rogers
Roasters. In addition, Nathans completed a merger with Miami Subs Corporation
("Miami Subs") whereby it acquired the remaining 70% of Miami Subs common stock
not already owned. Miami Subs features a wide variety of lunch, dinner and snack
foods, including hot and cold sandwiches and various ethnic foods. Roasters
features home-style family foods based on a menu centered around wood-fire
rotisserie chicken.
At March 26, 2000, the Company's restaurant system, consisting of Nathan's
Famous, Kenny Rogers Roasters and Miami Subs restaurants, included 32
company-owned units concentrated in the New York metropolitan area, New Jersey
and Florida, 415 franchised or licensed units, including 24 carts, kiosks, and
counter units, 8 units operating pursuant to management agreements and over
1,000 branded product points of sale under the Nathan's Branded Product Program,
operating in 44 states, the District of Columbia, and 16 foreign countries.
Organization of Business
In July 1987, all of the outstanding shares, options and warrants of Nathan's
Famous, Inc. (the "Predecessor Company"), a then publicly held New York
corporation, were acquired through a cash transaction, accounted for by the
purchase method of accounting (the "Acquisition"). In connection with the
Acquisition, a privately-held New York corporation (the "Acquiring Corporation")
was merged into the Predecessor Company. The purchase price exceeded the fair
value of the acquired assets of the Predecessor Company by $15,374, and such
amount is recorded net of accumulated amortization in the accompanying
consolidated balance sheets. In November 1989, the surviving corporation was
merged with Nathan's Newco, Inc., a Delaware corporation which, upon the
effectiveness of the merger, changed its name to Nathan's Famous, Inc. ("NFI").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Segment Disclosures
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131 "Disclosures About Segments of an Enterprise and
Related Information". Pursuant to this pronouncement, operating segments, are
defined as components of an enterprise about which separate financial
information is available and is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources in assessing performance.
Nathans considers their subsidiaries to be in the food service industry and as a
result have one single reporting operating unit.
Fiscal Year
The Company's fiscal year ends on the last Sunday in March, which results in a
52 or 53 week reporting period. The results of operations for all periods
presented are on the basis of a 52-week reporting period.
F-7
40
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash restricted for
untendered shares associated with the Acquisition amounted to $83 at March 26,
2000 and March 28, 1999, respectively, and is included in cash and cash
equivalents. At March 26, 2000, cash and cash equivalents included unexpended
Miami Subs' advertising funds of $509 with the offset classified as current
liabilities in the accompanying consolidated balance sheets.
Impairment of Notes Receivable
In accordance with SFAS No.114 "Accounting by Creditors for Impairment of a
Loan", Nathans applies the provisions thereof to value notes receivable.
Pursuant to SFAS No. 114, a loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When evaluating a
note for impairment, the factors that should be considered include; 1)
indications that the borrower is experiencing business problems such as
operating losses, marginal working capital, inadequate cash flow or business
interruptions; 2) loans secured by collateral that is not readily marketable or
3) that are susceptible to deterioration in realizable value. When determining
impairment, management's assessment includes its intention to extend certain
leases beyond the minimum lease term and the note holders ability to meet its
obligation over that extended term. In certain cases where Nathan's has
determined that a loan has been impaired, it does not expect to extend or renew
the underlying leases. Based on the Company's analysis it has determined that
there are notes that have incurred such an impairment (Note 5). Following is a
summary of the impaired notes receivable:
Total recorded investment in impaired notes receivable $ 1,830
Allowance for impaired notes receivable (840)
------------
Recorded investment in impaired notes receivable, net $ 990
===========
Inventories
Inventories, which are stated at the lower of cost or market value, consist
primarily of restaurant food items, supplies, marketing items and equipment for
sale under the Branded Product Program. Cost is determined using the first-in,
first-out method.
Marketable Securities and Investment in Limited Partnership
The Company classifies its investments in marketable securities as "trading" in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Such securities are reported at fair value, with unrealized
gains and losses included as a component of net income. Gains and losses on the
disposition of securities are recognized on the specific identification method
in the period in which they occur. Investment income in the trading limited
partnership is based upon Nathans proportionate share of the change in the
underlying net assets of the partnership. The partnership invests primarily in
publicly traded common stocks with a concentration in securities traded on
exchanges in the United States.
F-8
41
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Sales of Restaurants
The Company observes the provisions of SFAS No. 66, "Accounting for Sales of
Real Estate," which establishes accounting standards for recognizing profit or
loss on sales of real estate. This Statement provides for profit recognition by
the full accrual method, provided (a) the profit is determinable, that is, the
collectibility of the sales price is reasonably assured or the amount that will
not be collectible can be estimated, and (b) the earnings process is virtually
complete, that is, the seller is not obliged to perform significant activities
after the sale to earn the profit. Unless both conditions exist, recognition of
all or part of the profit shall be postponed and other methods of profit
recognition shall be followed. In accordance with this Statement, the Company
recognizes profit on sales of restaurants under both the installment method and
the deposit method, depending on the specific terms of each sale.
During 1999, the Company entered into contracts to sell 6 restaurants in two
separate transactions, for an aggregate sales price of $1,775. The sales price
consists of down payments totaling $230, and the issuance of notes receivable by
the buyers totaling $1,545. In accordance with the SFAS No. 66, profit from
these sales is being recognized under the deposit method. For the fiscal year
ended March 26, 2000, no revenue related to these sales has been recognized and
the notes receivable have not been recorded. The Company continues to record
depreciation expense on the property subject to the sales contracts and records
any principal payments received as a deposit until such time that the
transaction meets the sales criteria of SFAS No. 66. The deposits are included
in accrued expenses in the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated primarily on the
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
lease term of the related asset. The Company suspends depreciation and
amortization on assets related to restaurants that are held for sale. The
estimated useful lives are as follows:
Building and improvements 5 - 25 years
Machinery, equipment, furniture and fixtures 5 - 15 years
Leasehold improvements 5 - 20 years
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," impairment losses are
recorded on long-lived assets on a restaurant by restaurant basis whenever
impairment factors are determined to be present. The Company considers a history
of restaurant operating losses to be its primary indicator of potential
impairment for individual restaurant locations. The Company has identified three
and four units that have been impaired, and recorded charges of $465 and $302 to
the statements of operations for the fiscal years ended March 26, 2000 and March
28, 1999, respectively.
Intangible Assets
Intangible assets consist of (i) the goodwill resulting from the Acquisition;
(ii) trademarks and tradenames, franchise rights and recipes in connection with
Roasters and (iii) goodwill and certain identifiable intangibles resulting from
the Miami Subs acquisition (Note 3). These intangible assets are being amortized
over periods from 10 to 40 years. The Company periodically reviews intangible
assets for impairment, whenever events or changes in circumstances indicate that
the carrying amounts of those assets may not be recoverable. Management believes
that there is no impairment with respect to such intangible assets as of March
26, 2000.
Investment in Unconsolidated Affiliate
The Company accounted for its initial investment in Miami Subs under the equity
method of accounting until the completion of the merger. Accordingly, the
carrying value of the investment, prior to the acquisition, was equal to the
Company's initial cash investment in Miami Subs, plus its share of the loss of
Miami Subs through September 30, 1999 (Note 9).
F-9
42
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Fair Value of Financial Instruments
The Company accounts for the fair value of its financial instruments in
accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments". The carrying value of all financial instruments reflected in the
accompanying balance sheets approximated fair value at March 26, 2000 and March
28, 1999, respectively, with the exception of the investment in unconsolidated
affiliate which had a fair value of $3,109 at March 28, 1999.
Stock-Based Compensation
The Company complies with the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The provisions of SFAS No. 123 encourage entities to adopt a fair value based
method of accounting for stock compensation plans; however, these provisions
also permit the Company to continue to measure compensation costs under
pre-existing accounting pronouncements. If the fair value based method of
accounting is not adopted, SFAS No. 123 requires pro forma disclosures of net
income and net income per share in the notes to the financial statements (Note
14).
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distributions to
owners, for the period in which they are recognized. Comprehensive income is the
total of net income and all other nonowner changes in equity (or other
comprehensive income), such as unrealized gains or losses on securities
classified as available-for-sale, foreign currency translation adjustments and
minimum pension liability adjustments. Comprehensive income must be reported on
the face of the consolidated statements of operations or the consolidated
statements of stockholders' equity. The Company's operations did not give rise
to items includable in comprehensive income, which were not already in net
(loss) income for the three fiscal years in the period ended March 26, 2000.
Accordingly, the Company's comprehensive income is the same as its net income
for all years presented.
Start-up Costs
The Company accounts for pre-opening and similar costs in accordance with
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-up
Activities" which required companies to write-off all such costs as a
"cumulative effect of accounting change" upon adoption and to expense all those
costs as incurred in the future. The Company implemented the SOP during fiscal
1998, and the impact was not material to the results of operations.
Franchise and Area Development Fee Revenue Recognition
In connection with its franchising operations, the Company receives initial
franchise fees, development fees, royalties, contributions to marketing funds,
and in certain cases, revenue from sub-leasing restaurant properties to
franchisees. Initial franchise fees are recognized as income when substantially
all services and conditions relating to the sale of the franchise have been
performed or satisfied, which generally occurs when the franchised restaurant
commences operations. Development fees are non-refundable and the related
agreements require the franchisee to open a specified number of restaurants in
the development area within a specified time period or the agreements may be
canceled by the Company. Revenue from development agreements is deferred and
recognized as restaurants in the development area commence operations on a pro
rata basis to the minimum number of restaurants required to be open, or at the
time the development agreement is effectively canceled. Royalties, which are
based upon a percentage of the franchisee's gross sales, are recognized as
income when the fees are earned and become receivable and collectible. Revenue
from sub-leasing properties to franchisees is recognized as income as the
revenue is earned and becomes receivable and collectible. Sub-lease rental
income is presented net of associated lease costs in the accompanying
consolidated financial statements. Franchise and area development fees received
prior to completion of the revenue recognition process are recorded as deferred
revenue. At March 26, 2000 and March 28, 1999, $686 and $222, respectively, of
deferred franchise fees are included in the accompanying consolidated balance
sheets.
F-10
43
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Concentrations of Credit Risk
The Company's accounts receivable consist principally of receivables from
franchisees for royalties and advertising contributions and from sales under the
Branded Product Program. At March 26, 2000, two franchisees represented
approximately 11% each of franchise royalties receivable and at March 28, 1999,
one franchisee, represented approximately 12%, of franchise royalties receivable
(Note 5).
Advertising
The Company administers various advertising funds on behalf of its subsidiaries
to coordinate the marketing efforts of the Company. Under these arrangements,
the Company collects and disburses fees paid by franchisees and Company-owned
stores for national and regional advertising, promotional and public relations
programs. Contributions are based on specified percentages of net sales,
generally ranging up to 3%. Advertising contributions from Company-owned stores
are included in restaurant operating expenses in the accompanying consolidated
statements of operations. Net Company-owned store advertising expense was $700,
$436 and $424 for the fiscal years ended March 26, 2000, March 28, 1999 and
March 29, 1998, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled.
Reclassifications
Certain prior year balances have been reclassified to conform with current year
presentation.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
is effective for all fiscal years beginning after June 15, 2000 and will not
require retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet, measured at fair value. Derivative
instruments will be recognized as gains or losses in the period of change. The
Company does not expect the adoption of SFAS No. 133 to have a material impact
on its financial position or results of its operations as the Company does not
presently make use of derivative instruments.
In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101
explains the SEC staff's general framework for recognizing revenue, specific
criteria to be met, along with required disclosures related to revenue
recognition. SAB No. 101 did not have a material impact on the financial
position or results of its operations.
F-11
44
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
3. ACQUISITIONS
On February 19, 1999, the U. S. Bankruptcy Court for the Middle District of
North Carolina, Durham Division, confirmed the Joint Plan of Reorganization of
the Official Committee of Franchisees of Roasters Corp. and Roasters Franchise
Corp., operators of Kenny Rogers Roasters Restaurants. Under the Joint Plan of
Reorganization, on April 1, 1999, Nathan's acquired the intellectual property
rights, including trademarks, recipes and franchise agreements, of Roasters
Corp. and Roasters Franchise Corp. for $1,250 in cash plus related expenses of
approximately $340. NF Roasters Corp., a wholly-owned subsidiary, was created
for the purpose of acquiring these assets. The acquired assets are recorded as
intangibles in the accompanying consolidated balance sheet and are being
amortized on a straight-line basis over periods of 10 to 20 years. No
company-owned restaurants were acquired in this transaction. Results of
operations are included in these consolidated financial statements as of April
1, 1999. On November 17, 1999, Roasters acquired two restaurants from a
franchisee for approximately $400, which opened in March and April 2000,
respectively.
On November 25, 1998, the Company acquired 8,121,000 (2,030,250 after giving
effect to a 4 for 1 reverse stock split) shares, or approximately 30% of the
then outstanding common stock, of Miami Subs Corporation for $4,200, excluding
transaction costs. On January 15, 1999, the Company and Miami Subs entered into
a definitive merger agreement pursuant to which Nathan's would acquire the
remaining outstanding shares of Miami Subs in exchange for shares of and
warrants to purchase Nathan's common stock.
On September 30, 1999, Nathan's completed the acquisition of Miami Subs and
acquired the remaining outstanding common stock of Miami Subs in exchange for
2,317,980 shares of Nathan's common stock, 579,040 warrants to purchase Nathan's
common stock, and the assumption of existing employee options and warrants to
purchase 542,284 shares of Miami Subs' common stock in connection with the
merger. The total purchase price was approximately $13,000 including acquisition
costs. The acquisition was accounted for as a purchase under Accounting
Principles Board ("APB") Opinion No. 16, "Accounting for Business Combinations".
In accordance with APB No. 16, the Company allocated the purchase price of Miami
Subs based on the estimated fair value of the assets acquired and liabilities
assumed. Portions of the purchase price allocations were determined by
professional appraisers utilizing recognized valuation procedures and
techniques. Goodwill of $2,087 resulted from the acquisition of Miami Subs is
being amortized over a period of 20 years.
In connection with the acquisition of Miami Subs, Nathan's plans to permanently
close 18 under performing company-owned restaurants. Nathan's expects to sell
the related assets at amounts below the historical carrying amounts recorded by
Miami Subs. In accordance with APB No. 16, the write-down of these assets was
reflected as part of the purchase price allocation. The estimated disposal value
is included in assets held for sale in the accompanying consolidated balance
sheet.
As of March 26, 2000, the Company has accrued approximately $660 for lease
termination costs, as part of the acquisition. Nathan's expects to accrue
additional lease termination costs related to restaurants to be closed for which
the amounts cannot be reasonably estimated at this time. Accordingly, goodwill
associated with this acquisition will increase based upon the additional
accruals recorded to close these remaining restaurants. As of March 26, 2000,
future annual minimum lease payments related to the stores for which no accrual
has yet been recorded, are $1,322 with remaining lease terms ranging from 2 to
18 years.
The preliminary allocation of purchase price is as follows:
Current assets $ 5,481
Property and equipment 7,730
Assets held for sale 945
Intangibles 5,249
Goodwill 2,087
Notes receivable - long-term 3,860
Other assets 393
Liabilities assumed (12,734)
---------
Total $ 13,011
========
F-12
45
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
As indicated earlier, some allocations are based on studies and valuations which
are currently being finalized. Management does not believe that the final
purchase price allocation will produce materially different results than those
reflected herein, except as it relates to the final lease acquisition reserve.
The consolidated results of operations for Miami Subs are included in the
consolidated financial statements as of the date of acquisition. Summarized
below are the unaudited pro forma results of operations for the fifty-two weeks
ended March 26, 2000 and March 28, 1999 of Nathan's as though the Miami Subs
acquisition had occurred as of the beginning of the periods presented.
Adjustments have been made for amortization of goodwill based upon a preliminary
allocation of the purchase price, salary expense based on employment agreements,
reversal of Miami Subs merger costs, elimination of Nathan's 30% equity earnings
in Miami Subs, reduction of interest income on marketable securities used to
purchase the initial 30% of Miami Subs' common stock and issuance of common
stock.
Fifty-two weeks ended
------------------ --------------------
March 26, 2000 March 28, 1999
Unaudited
Total revenues $ 50,455 $ 53,278
========== ==========
Net (loss) income $ (1,466) $ 3,436
========== ==========
Net (loss) income per share:
Basic $ (.21) $ 0.49
========== ==========
Diluted $ (.21) $ 0.49
========== ==========
Weighted average shares used in computing net (loss)
income per share
Basic 7,040 7,040
========== ==========
Diluted 7,040 7,071
========== ==========
The unaudited pro forma information for the fifty-two weeks ended March 28, 1999
combines Nathan's results of operations for the fifty-two weeks ended March 28,
1999 with Miami Subs' results of operations for the twelve months ended May 31,
1999.
These pro forma results of operations have been prepared for comparative
purposes only and are not necessarily indicative of actual results of operations
that would have occurred had the acquisition been made at the beginning of the
periods presented or of the results which may occur in the future.
4. NET (LOSS) INCOME PER SHARE
The Company complies with the provisions of SFAS No. 128, "Earnings Per Share".
Under SFAS No. 128, Basic Earnings Per Share is computed based on weighted
average shares outstanding and excludes any potential dilution; Diluted Earnings
Per Share reflects potential dilution from the exercise or conversion of
securities into common stock or from other contracts to issue common stock.
The following chart provides a reconciliation of information used in calculating
the per share amounts for the years ended March 26, 2000, March 28, 1999 and
March 29, 1998, respectively:
Net (Loss) Income Shares Net (Loss) Income Per Share
------------------------------ ------------------------------ ---------------------------
2000 (1) 1999 1998 2000 (1) 1999 1998 2000 (1) 1999 1998
Basic EPS
Basic calculation $(1,270) $ 2,728 $ 1,528 5,881 4,722 4,722 $(.22) $.58 $.32
Effect of dilutive
employee stock options
and warrants -- -- -- -- 31 27 -- (.01) --
------- ------- ------- ------- ------- ------- ----- ---- ----
Diluted EPS
Diluted calculation $(1,270) $ 2,728 $ 1,528 5,881 4,753 4,749 $(.22) $.57 $.32
======= ======= ======= ======= ======= ======= ===== ==== ====
F-13
46
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(1) Common stock equivalents have been excluded from the computation for
earnings per share for the year end March 26, 2000 as their would be
anti-dilutive.
5. NOTES AND ACCOUNTS RECEIVABLE, net
Notes and accounts receivable, net, consists of the following:
2000 1999
Notes receivable, net of impairment charges $3,226 $ --
Franchise and license royalties 2,110 1,192
Branded product sales 365 460
Other 253 393
------ ------
5,954 2,045
Less: allowance for doubtful accounts 809 467
Notes receivable due after one year 2,527 --
------ ------
Notes and accounts receivable $2,618 $1,578
====== ======
Notes receivable at March 26, 2000 principally resulted from sales of restaurant
businesses to franchisees by Miami Subs and are generally guaranteed by the
purchaser and collateralized by the restaurant businesses and assets sold. The
notes are generally due in monthly installments of principal and interest with a
balloon payment at the end of the term, with interest rates ranging principally
between 8% and 12%.
6. MARKETABLE SECURITIES AND INVESTMENT IN LIMITED PARTNERSHIP
Marketable securities at March 26, 2000 and March 28, 1999 consisted of trading
securities with aggregate fair values of $2,997 and $3,267, respectively. Fair
values of corporate and municipal bonds are based upon quoted market prices.
Investment income in trading limited partnerships is based on the Company's
proportionate share of the change in the underlying net assets of the
partnership.
The gross unrealized holding gains and fair values of trading securities by
major security type at March 26, 2000, March 28, 1999 and March 29, 1998 were as
follows:
2000 1999 1998
------------------------ ------------------------ -------------------------
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Holding Value of Holding Value of Holding Value of
Gain Investments Gain Investments Gain Investments
---- ----------- ---- ----------- ---- -----------
Commercial paper $ -- $ -- $ -- $ -- $ -- $ --
Corporate bonds -- -- 1 219 6 563
Municipal bonds 3 1,539 63 2,011 29 6,936
Investment in trading limited
partnerships* 420 1,458 23 1,037 212 1,015
-------- -------- -------- -------- -------- --------
$ 423 $ 2,997 $ 87 $ 3,267 $ 247 $ 8,514
======== ======== ======== ======== ======== ========
* Subject to the terms of the partnership, the Company has the right to
liquidate its investment in the trading limited partnerships without
penalty.
F-14
47
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
7. PROPERTY AND EQUIPMENT, net
Property and equipment, net, consists of the following:
2000 1999
Construction in progress $ 1,055 $ 94
Land 3,631 896
Building and improvements 4,149 1,630
Machinery, equipment, furniture and fixtures 6,258 4,703
Leasehold improvements 6,891 6,659
------- -------
21,984 13,982
Less: accumulated depreciation and amortization 8,007 7,689
------- -------
$13,977 $ 6,293
======= =======
Included in property and equipment, net is approximately $1,459 of assets
subject to sales contracts (Note 2).
8. INTANGIBLE ASSETS, net
Intangible assets consist of the following:
2000 1999
Goodwill $17,477 $15,390
Trademark, tradename, franchise rights and recipes 6,839 --
------- -------
24,316 15,390
Less: accumulated amortization 5,224 4,508
------- -------
Intangible assets, net $19,092 $10,882
======= =======
Amortization expense related to these intangible assets was $716, $384 and $384
for each of the three fiscal years in the period ended March 26, 2000, March 28,
1999 and March 29, 1998, respectively.
9. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On November 25, 1998, Nathan's acquired 8,121,000 (2,030,250 after giving effect
to a 4 for 1 reverse stock split) shares of Miami Subs in a private purchase
transaction from the former Chairman and CEO of Miami Subs in consideration of
the sum of $4,200. The 2,030,250 shares represent approximately 30% of the then
issued and outstanding shares of Miami Subs.
Condensed summarized financial data for Miami Subs as of and for the six months
ended May 31, 1999, is as follows:
Condensed Balance Sheet Data
Current assets $ 6,513
Non-current assets 22,675
Current liabilities 5,949
Non-current liabilities 6,632
Condensed Statements of Income Data
Revenue $11,771
Net income 51
F-15
48
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
At March 28, 1999, the Company did not record in its investment balance the
results of operations of Miami Sub's for the month ended March 31, 1999, and
accordingly a one-month reporting lag existed in the investment in
unconsolidated affiliate balance in the accompanying balance sheet at that time.
Nathan's recorded its equity in loss up through the date of the acquisition of
the remaining 70% of Miami Subs.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
2000 1999
Professional fees $ 813 $ 492
Legal costs 427 41
Wages & bonuses 1,006 464
Vacation & sick 530 412
Lease termination closed restaurants 660 --
Insurance 837 719
Untendered shares 83 83
Sales and payroll taxes payable 170 291
Rent, occupancy and sublease termination costs 1,186 341
Restaurant sales deposit 235 --
Marketing fund 509 --
Income taxes payable 273 129
Other 1,669 462
------ ------
$8,398 $3,434
====== ======
11. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
A summary of notes payable and capitalized lease obligations is as follows:
2000
Note payable to bank at 8.5% through January 2003 and adjusting to prime plus 0.25%
in 2003, 2006, and 2009 and maturity in 2010 $ 1,667
Note payable to bank at 8.0% through January 2002 adjusting to prime plus 0.25% in
2002 and 2005 and maturing in 2008 869
Note payable to bank at 1.5% over prime (9.0% at March 26, 2000) and maturing in 2001 389
Note payable to bank at 8.75% and maturing in 2003 406
Capital lease obligations and other 79
-------
Total 3,410
Less current portion (279)
-------
Long-term portion $ 3,131
=======
The above notes are secured by property and equipment with a book value of
approximately $2,589 at March 26, 2000, and notes and accounts receivable of
approximately $1,000.
At March 26, 2000, the approximate annual maturities of notes payable and
capitalized lease obligations for each of the five years are $279, $605, $620,
$235 and $236, respectively, and $1,435 thereafter.
The Company also maintains a $5,000 line of credit with its primary banking
institution. Borrowings under the line of credit are intended to be used to meet
the normal short-term working capital needs of the Company. The line of credit
is not a commitment and, therefore, credit availability is subject to ongoing
approval. The line of credit expires on October 1, 2000, and bears interest at
the prime rate. There were no borrowings outstanding under this line of credit
at March 26, 2000.
F-16
49
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
12. OTHER (EXPENSE) INCOME
Included in other (expense) income, in the accompanying consolidated statements
of operations is (i) $236 in connection with the satisfaction of certain
financial guarantees and $191 in lease expense resulting from the default of
subleases for the year ended March 26, 2000 and (ii) the reversal of a previous
litigation accrual of $349 (Note 15) for the year ended March 28, 1999.
13. INCOME TAXES
Income tax (benefit) expense consists of the following for the years ended March
26, 2000, March 28, 1999 and March 29, 1998:
2000 1999 1998
Federal:
Current $ 461 $ 453 $ 255
Deferred (719) 297 331
------- ------- -------
(258) 750 586
------- ------- -------
State and local:
Current 247 165 98
Deferred (239) 110 129
------- ------- -------
8 275 227
------- ------- -------
Adjustment to valuation allowance relating to opening net deferred tax
asset -- (1,443) (523)
------- ------- -------
$ (250) $ (418) $ 290
======= ======= =======
Total income tax (benefit) expense for fiscal years ended March 26, 2000, March
28, 1999 and March 29, 1998 differed from the amounts computed by applying the
United States Federal income tax rate of 34% to income before income taxes as a
result of the following:
2000 1999 1998
Computed "expected" tax (benefit) expense $ (516) $ 785 $ 618
Nondeductible amortization 212 131 131
State and local income taxes, net of Federal income tax benefit 8 181 149
Tax-exempt investment earnings (30) (112) (55)
Change in the valuation allowance for net deferred tax assets -- (1,443) (523)
Meals and entertainment and other 76 40 (30)
------- ------- -------
$ (250) $ (418) $ 290
======= ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
2000 1999
Deferred tax assets:
Accrued expenses $ 601 $ 591
Allowance for doubtful accounts 409 196
Impairment of notes receivable 352 --
Deferred revenue 501 43
Depreciation expense and impairment of long-lived assets 898 1,292
Expenses not deductible until paid 789 --
Net operating loss and other carryforwards 2,326 --
Other 181 11
------- -------
Total gross deferred tax assets 6,057 2,133
------- -------
Deferred tax liabilities:
Amortization of intangibles 297 --
Unrealized gain on marketable securities and income on investment in 402 219
limited partnership
Other 343 --
------- -------
Total gross deferred tax liabilities 1,042 219
------- -------
Net deferred tax asset 5,015 1,914
Less: Valuation allowance (2,726) (400)
------- -------
$ 2,289 $ 1,514
======= =======
F-17
50
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
In both fiscal year 1999 and 1998, management of the Company determined that,
more likely than not, a significant portion of its previously-reserved deferred
tax assets would be realized and, accordingly, reduced the related valuation
allowance. The reduction in the valuation allowance is included in the income
tax (benefit) provision in the accompanying consolidated statement of operations
for fiscal 1999 and 1998. The determination that the net deferred tax asset of
$1,514 at March 28, 1999 was realizable was based on the Company's profitability
during the past three fiscal years. The determination that the net deferred tax
asset of $2,289 at March 26, 2000 is realizable is based on projected future
taxable income.
As of the date of the acquisition, Miami Subs' had net operating loss
carry-forwards of approximately $5.7 million which are available to reduce
future taxable income through 2019 subject to limitations imposed under the
Internal Revenue Code regarding changes in ownership which limits utilization of
the carry-forwards on an annual basis. Miami Subs also has general business
credit carry-forwards of approximately $274, which can be used to offset tax
liabilities through 2010. Miami Subs' federal income tax returns for fiscal
years 1991 through 1996, inclusive, have been examined by the Internal Revenue
Service ("IRS"). The reports of the examining agent issued in connection with
these examinations indicate that additional taxes and penalties totaling
approximately $2.4 million are due for such years. Miami Subs is appealing
substantially all of the proposed adjustments. The Company has recorded a
liability of $345 for this matter and believes that such accruals are adequate.
Due to the uncertain outcome of the IRS examination and the Section 382
limitations, the Company has recorded a valuation allowance for the Miami Subs
the carryforwards. In accordance with SFAS No. 109 "Accounting for Income Taxes"
any future reduction in the acquired Miami Subs valuation allowance will reduce
goodwill.
14. STOCK PLANS AND OTHER EMPLOYEE BENEFIT PLANS
Stock Option Plans
On December 15, 1992, the Company adopted the 1992 Stock Option Plan (the
"Plan") which provides for the issuance of incentive stock options (ISO's) to
officers and key employees and non-qualified stock options to directors,
officers and key employees. Up to 525,000 shares of common stock have been
reserved for issuance under the Plan. The terms of the options are generally ten
years, except for ISO's granted to any employee, whom prior to the granting of
the option, owns stock representing more than 10% of the voting rights, for
which the option term will be five years. The exercise price for non-qualified
stock options outstanding under the Plan can be no less than the fair market
value, as defined, of the Company's common stock at the date of grant. For
ISO's, the exercise price can generally be no less than the fair market value of
the Company's common stock at the date of grant, with the exception of any
employee who prior to the granting of the option, owns stock representing more
than 10% of the voting rights, for which the exercise price can be no less than
110% of fair market value of the Company's common stock at the date of grant.
On May 24, 1994, the Company adopted the Outside Director Stock Option Plan (the
"Directors' Plan") which provides for the issuance of non-qualified stock
options to non-employee directors, as defined, of the Company. Under the
Directors' Plan, 200,000 shares of common stock have been authorized and issued
pursuant to the Directors' Plan. Options awarded to each non-employee director
are fully vested, subject to forfeiture under certain conditions and shall be
exercisable upon vesting. There were no options granted under the provisions of
the Directors Plan during the years ended March 26, 2000, March 28, 1999 and
March 29, 1998, respectively. During the year, 50,000 options that were
previously issued were canceled which are not available for reissuance.
In April 1998, the Company adopted the Nathan's Famous Inc. 1998 Stock Option
Plan (the "New Plan"), which provides for the issuance of non-qualified stock
options to directors, officers and key employees. Up to 500,000 shares of common
stock have been reserved for issuance under the New Plan. In April 1998, the
Company granted 120,000 ISO's under the 1992 Stock Option Plan and the Company
also issued 30,000 stock options to its non-employee directors under the New
Plan. In October 1999, the Company granted 465,000 stock options under the New
Plan.
The Plan, the New Plan and the Directors' Plan expire on December 2, 2002, April
5, 2008 and December 31, 2004, respectively, unless terminated earlier by the
Board of Directors under conditions specified in the Plan.
F-18
51
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The Company issued 478,584 stock options to employees of Miami Subs Corporation
to replace 957,168 of previously issued Miami Subs options pursuant to the
merger agreement and issued 47,006 new options. All options were fully vested
upon consummation of the merger. Exercise prices range from a low of $3.1875 to
a high of $22.2517 per share and expire at various times through September 30,
2009.
Warrants
In November 1996, the Company granted to a non-employee consultant a warrant to
purchase 50,000 shares of its common stock at an exercise price of $3.94 per
share, which represented the market price of the Company's common stock on the
date of grant. Upon the date of grant, one-third of the shares vested
immediately, one-third on the first anniversary thereof, and the remaining
one-third on the second anniversary thereof. The warrant expires on November 24,
2001.
On July 17, 1997, the Company also granted an additional warrant to purchase
150,000 shares of its common stock at an exercise price of $3.25 per share, the
actual market price of the Company's common stock on the date of grant, to its
Chairman and Chief Executive Officer.
In connection with the merger with Miami Subs, the Company issued 579,040
warrants to purchase common stock to the former shareholders of Miami Subs.
These warrants expire on September 30, 2004 and have an exercise price of $6.00
per share. The Company also issued 63,700 warrants to purchase common stock to
the former warrant holders of Miami Subs. Exercise prices range between $16.55
per share and $49.63 per share expiring through March 2006.
A summary of the status of the Company's stock option plans and warrants
excluding warrants issued to former shareholders of Miami Subs at March 26,
2000, March 28, 1999 and March 29, 1998 and changes during the years then ended
is presented in the tables and narrative below:
2000 1999 1998
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding - beginning of year 707,667 $5.08 600,167 $5.03 601,167 $5.54
Granted 512,006 3.34 150,000 4.83 - -
Exercised - -
Replacement options - Miami Subs 478,584 6.04 - - - -
Canceled (83,333) 5.50 (42,500) 5.08 (1,000) 7.00
-------- ------- ---------
Options outstanding - end of year 1,614,924 4.79 707,667 5.08 600,167 5.03
========= ======= =======
Options exercisable - end of year 1,086,424 528,167 485,503
========= ======= =======
Weighted average fair value of options
granted $2.10 $1.77
===== =====
Warrants outstanding - beginning of year 350,000 $3.88 350,000 $3.88 200,000 $4.36
Granted - - - - 150,000 3.25
Replacement warrants - Miami Subs 63,700 24.09 - - - -
Expired (12,500) 49.63 - - - -
------- ------- -------- -------
Warrants outstanding - end of year 401,200 5.66 350,000 3.88 350,000 3.88
------- ------- -------
Warrants exercisable - end of year 401,200 237,500 145,834
======= ------- =======
Weighted average fair value of warrants
granted $1.68 $1.56
===== =====
At March 26, 2000, 85,666 common shares were reserved for future stock option
issuance.
F-19
52
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The following table summarizes information about stock options and warrants
(excluding warrants issued to the Miami Subs shareholders as part of the merger
consideration) at March 26, 2000:
Options and
Options and Warrants Outstanding Warrants Exercisable
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at Exercise
Range of Exercise Prices 3/26/00 Contractual Life Price 3/26/00 Price
$ 3.19 to $ 4.00 1,227,558 8.6 $ 3.41 699,058 $ 3.40
4.01 to 7.00 614,903 4.6 5.46 614,903 5.46
7.01 to 22.25 173,663 2.5 15.16 173,663 15.16
------------- ------------ ---------- ------------ ----------
$ 3.19 to $ 22.25 2,016,124 6.7 $ 5.04 1,487,624 $ 5.62
============= ============ ======== ============ ========
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
2000 1999
Expected life (years) 6.3 6.5
Interest rate 6.22% 5.58%
Volatility 59.3% 32.77%
Dividend yield 0% 0%
The Company has adopted the pro forma disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized in the accompanying financial statements for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined under SFAS No. 123, the Company's net income and earnings per share
would approximate the pro forma amounts below:
(in thousands, except per share amounts)
2000 1999
Net (loss) income: As reported $ (1,270) $ 2,728
Pro forma (1,907) 2,247
Net (loss) income per share: Basic
As reported $ (.22) $ .58
Pro forma (.32) .48
Diluted
As reported $ (.22) $ .57
Pro forma (.32) .47
Because the SFAS No. 123 method of accounting is not applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
F-20
53
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Common Stock Purchase Rights
On June 20, 1995, the Board of Directors declared a dividend distribution of one
common stock purchase right (the "Rights") for each outstanding share of Common
Stock of the Company. The distribution was paid on June 20, 1995 to the
shareholders of record on June 20, 1995. The terms of the Rights were amended on
April 6, 1998 and December 8, 1999. Each Right, as amended, entitles the
registered holder thereof to purchase from the Company one share of the Common
Stock at a price of $4.00 per share (the "Purchase Price"), subject to
adjustment for anti-dilution. New Common Stock certificates issued after June
20, 1995 upon transfer or new issuance of the Common Stock will contain a
notation incorporating the Rights Agreement by reference.
The Rights are not exercisable until the Distribution Date. The Distribution
Date is the earlier to occur of (i) ten days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") acquired, or obtained the right to acquire, beneficial ownership of 15%
or more of the outstanding shares of the Common Stock, as amended, or (ii) ten
business days (or such later date as may be determined by action of the Board of
Directors prior to such time as any person becomes an Acquiring Person)
following the commencement, or announcement of an intention to make a tender
offer or exchange offer by a person (other than the Company, any wholly-owned
subsidiary of the Company or certain employee benefit plans) which, if
consummated, would result in such person becoming an Acquiring Person. The
Rights will expire on June 19, 2005, unless earlier redeemed by the Company.
At any time prior to the time at which a person or group or affiliated or
associated persons has acquired beneficial ownership of 15% or more of the
outstanding shares of the Common Stock of the Company, the Board of Directors of
the Company may redeem the Rights in whole, but not in part, at a price of $.001
per Right. In addition, the Rights Agreement, as amended, permits the Board of
Directors, following the acquisition by a person or group of beneficial
ownership of 15% or more of the Common Stock (but before an acquisition of 50%
or more of Common Stock), to exchange the Rights (other than Rights owned by
such 15% person or group), in whole or in part, for Common Stock, at an exchange
ratio of one share of Common Stock per Right.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a shareholder of the Company, including, without limitation, the right to vote
or to receive dividends. The Company has reserved 6,297,216 shares of Common
Stock for issuance upon exercise of the Rights.
Restricted Stock Grants
In December 1992, the Company awarded an aggregate of 50,016 shares of common
stock to two executive officers. Pursuant to the terms of the agreement, the
shares were subject to certain restrictions. Compensation expense, based upon
the fair market value of the stock on the date of grant, was determined by the
Company to be $7 per share. Aggregate compensation expense of $280 has been
recognized ratably over the six year period in which the restrictions lapse and
has been included as deferred compensation as a component of stockholders'
equity in the accompanying consolidated statement of stockholders' equity.
Compensation expense was approximately $0, $34 and $47 for the fiscal years
ended March 26, 2000, March 28, 1999 and March 29, 1998, respectively. The
restrictions lapsed for all shares in December 1998.
Employment Agreements
The Company and its Chairman and Chief Executive Officer entered into a new
employment agreement effective as of January 1, 2000. The new employment
agreement expires December 31, 2004. Pursuant to the agreement, the officer
receives a base salary of $1.00 and an annual bonus equal to 5% of the company's
consolidated pre-tax earnings for each fiscal year, with a minimum bonus of
$250. The new employment agreement further provides for a three-year consulting
period after termination of employment during which the officer will receive
consulting payments in an annual amount equal to two thirds of the average of
the annual bonuses awarded to him during the three fiscal years preceding the
fiscal year of termination of his employment. The employment agreements also
provide for the continuation of certain benefits following death or disability.
In connection with the agreement, the Company agreed to issue to the officer
25,000 shares of common stock.
F-21
54
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
In the event that the officer's employment is terminated without cause, he is
entitled to receive his salary and incentive payment, if any, for the remainder
of the contract term. The employment agreement further provides that in the
event there is a change in control of the Company, as defined therein, the
officer has the option, exercisable within one year after such an event, to
terminate his employment agreement. Upon such termination, he has the right to
receive a lump sum payment equal to the greater of (i) his salary and annual
bonuses for the remainder of the employment term (including a prorated bonus for
any partial fiscal year), which bonus shall be equal to the average of the
annual bonuses awarded to him during the three fiscal years preceding the fiscal
year of termination; or (ii) 2.99 times his salary and annual bonus for the
fiscal year immediately preceding the fiscal year termination, as well as a lump
sum cash payment equal to the difference between the exercise price of any
exercisable options having an exercise price of less than the current market
price of the Company's common stock and such then current market price. In
addition, the Company will provide the officer with a tax gross-up payment to
cover any excise tax due.
The Company and its President and Chief Operating Officer entered into an
employment agreement on December 28, 1992 for a period commencing on January 1,
1993 and ending on December 31, 1996. The employment agreement has been extended
annually through December 31, 1998, based on the original terms, and no
non-renewal notice has been given as of June 21, 2000. The agreement provides
for annual compensation of $275 plus certain other benefits. In November 1993,
the Company amended this agreement to include a provision under which the
officer shall have the right to terminate the agreement and receive payment
equal to approximately three times annual compensation upon a change in control,
as defined.
The Company and the President of Miami Subs, pursuant to the merger agreement,
entered into an employment agreement on September 30, 1999 for a period
commencing on September 30, 1999 and ending on September 30, 2002. The agreement
provides for annual compensation of $200 plus certain other benefits and
automatically renews annually unless 180 days prior written notice is given to
the employee. The agreement includes a provision under which the officer shall
have the right to terminate the agreement and receive payment equal to
approximately three times annual compensation upon a change in control, as
defined.
The Company and its Vice President - Finance and Chief Financial Officer entered
into an employment agreement on January 31, 2000 that ends on January 31, 2002.
The agreement provides for annual compensation of $155 plus certain other
benefits. This agreement includes a provision under which the officer shall have
the right to terminate the agreement and receive payment equal to approximately
three times annual compensation upon a change in control, as defined.
The Company and two executives of Miami Subs, pursuant to the merger agreement,
entered into employment agreements on September 30, 1999 for a period commencing
on September 30, 1999 and ending on September 30, 2000 or September 30, 2001.
The agreements provide for total annual compensation of $260 plus certain other
benefits and automatically renew annually unless 180 days prior written notice
is given to the employee. The agreement includes a provision under which the
officer shall have the right to terminate the agreement and receive payment
equal to approximately three times annual compensation upon a change in control,
as defined.
Each employment agreement terminates upon death or voluntary termination by the
respective employee or may be terminated by the Company upon 30 days prior
written notice by the Company in the event of disability or "cause", as defined
in each agreement.
401(k) Plan
In March 1992, the Company adopted a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code covering all non-union employees
over age 21 who have been employed by the Company for at least one year.
Employees may contribute to the plan, on a tax-deferred basis, up to 15% of
their total annual salary. Company contributions are discretionary. Beginning
with the plan year ending February 28, 1994, the Company elected to match
contributions at a rate of $.25 per dollar contributed by the employee on up to
a maximum of 3% of the employee's total annual salary. Employer contributions
for the fiscal years ended March 26, 2000, March 28, 1999 and March 29, 1998
were $21, $13 and $12, respectively.
F-22
55
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Other Benefits
The Company provides, on a contributory basis, medical benefits to active
employees. The Company does not provide medical benefits to retirees.
15. COMMITMENTS AND CONTINGENCIES
Commitments
The Company's operations are principally conducted in leased premises. The
leases generally have initial terms ranging from 5 to 20 years and usually
provide for renewal options ranging from 5 to 20 years. Most of the leases
contain escalation clauses and common area maintenance charges (including taxes
and insurance). Certain of the leases require additional (contingent) rental
payments if sales volumes at the related restaurants exceed specified limits. As
of March 26, 2000, the Company has non-cancelable operating lease commitments,
net of certain sublease rental income, as follows:
Lease Sublease Net lease
Commitments Income Commitments
----------- ------ -----------
2001 7,179 3,715 3,464
2002 6,630 3,327 3,303
2003 5,872 2,897 2,975
2004 5,222 2,543 2,679
2005 4,746 2,327 2,419
Thereafter 24,266 13,774 10,492
The Company also owns or leases sites, which it leases or subleases to
franchisees. The Company remains liable for all lease costs when properties are
subleased to franchisees. In addition, the Company guarantees the lease payments
of two franchised locations, aggregating approximately $82,000 through June
2000.
The Company also subleases non-Miami Subs locations to third parties. Such
sub-leases provide for minimum annual rental payments by the Company aggregating
approximately $118,000 and expire on various dates through 2004 exclusive of
renewal options.
Contingent rental payments on building leases are typically made based on the
percentage of gross sales on the individual restaurants that exceed
predetermined levels. The percentage of gross sales to be paid and related gross
sales level vary by unit. Contingent rental expense was approximately $123, $113
and $124 for the fiscal years ended March 26, 2000, March 28, 1999 and March 29,
1998, respectively.
Contingencies
On February 28, 1995, an action entitled Textron Financial Corporation v. 1045
Rush Street Associates, Stephen Anfang, and Nathan's Famous, Inc. was instituted
in the Circuit Court of Cook County, Illinois County Department, Chaucery
Division. The complaint alleges that the Company conspired to perpetrate a fraud
upon the plaintiff and alleges that the Company breached its lease with 1045
Rush Street associates and the estoppel agreement delivered to the plaintiff in
connection therewith by subleasing these premises and thereafter assigning the
lease with respect to the premises to a third party franchisee, and further by
failing to pay rent under this lease on and after July 1990. This complaint
seeks damages in the amount of at least $1,500. The Company has filed its answer
to this complaint denying the material allegations of the complaint and
asserting several affirmative defenses to liability including, but not limited
to, the absence initially or subsequent failure of consideration for the
estoppel agreement, equitable estoppel, release, failure to mitigate and other
equitable and legal defenses. The plaintiff has added as additional parties
defendant, the attorney who represented the landlord in the financing
transaction in connection with which the Estoppel Agreement was required. The
Company and some of the named defendants entered into a Settlement with Textron
whereby all of the plaintiff's claims against the Company and the other
defendants were resolved under a Settlement Agreement and Mutual Release that
provide for payments to be made jointly by all of the defendants on or before
December 30, 1998 and January 15, 1999, which payments were made (Note 12).
F-23
56
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
On or about December 1996, Nathan's Famous Systems, Inc. ("Systems") instituted
an action in the Supreme Court of New York, Nassau County, against Philli Foods,
Inc. a franchisee, and Calvin Danzig as a guarantor of Foods' payment and
performance obligations, to recover royalty fees and advertising contributions
due to Systems in the aggregate amount of $36 under a franchise agreement
between Systems and Phylli Foods dated June 1, 1994. In their answer, the
defendants essentially denied the material allegations of the complaint and
interposed counterclaims against Systems in which they alleged essentially that
Systems fraudulently induced the defendants to purchase the franchise from
Systems or did so by means of negligent misrepresentation. Defendants also
alleged that by reason of Systems' allegedly fraudulent and deceitful conduct,
Systems violated the General Business Law of New York. As a consequence of the
foregoing, the defendants are seeking damages in excess of five million dollars,
as well as statutory relief under the General Business Law. Systems has moved to
dismiss the counterclaims on the grounds that they are insufficiently pleaded
and otherwise fail to state a sustainable claim against Systems upon which
relief may be granted. During fiscal 1998, Systems' motion was granted except
for the claim seeking statutory relief under the General Business Law.
The Company was named as one of three defendants in an action commenced in June
1997, in the Supreme Court of New York, Queens County. According to the
complaint, the plaintiff, a dentist, is seeking injunctive relief and damages in
an amount exceeding $5,000 against the landlord, one of the Company's
franchisees and the Company claiming that the operation of a restaurant in a
building in Long Island City created noxious and offensive fumes and odors that
allegedly were injurious to the health of the plaintiff and his employees and
patients, and interfered with, and irreparably damaged his practice. Plaintiff
also claims that the landlord fraudulently induced him to enter a lease
extension by representing that the first floor of the building would be occupied
by a non-food establishment. As a result of a motion for summary judgement by
the Company and Nathans Famous Systems, Inc. ("Systems") which, as the actual
franchisor was added to the action as a defendant, the Company was dismissed
from the action. Neither the Company or Systems believes that there is any merit
to the plaintiff's claims against Systems inasmuch as Systems never was a party
to the lease, and the restaurant, which closed in or about August 1995, was
operated by a franchisee exclusively. By stipulation, the plaintiff has recently
agreed to limit his damages only to the costs associated with relocating his
practice which are less than $500. The Company is defending the action
vigorously.
On January 5, 1999, Miami Subs was served with a class action lawsuit entitled
Robert J. Feeney, on behalf of himself and all other similarly situated vs.
Miami Subs Corporation, et al., in Broward County Circuit Court, which was filed
against Miami Subs, its directors and Nathan's in a Florida state court by a
shareholder of Miami Subs. Since that time, the Company and its designees to the
Miami Subs board have also been served. The suit alleges that the proposed
merger between Miami Subs and the Company, as contemplated by the companies'
non-binding letter of intent, is unfair to Miami Subs' shareholders and
constitutes a breach by the defendants of their fiduciary duties to the
shareholders of Miami Subs. The plaintiff seeks among other things: (i) class
action status; (ii) preliminary and permanent injunctive relief against
consummation of the proposed merger; and (iii) unspecified damages to be awarded
to the shareholders of Miami Subs. On April 7, 2000, the plaintiff filed his
dismissal without prejudice of the action, effectively ending the case against
all the defendants.
The Company is involved in various other litigation in the normal course of
business, none of which, in the opinion of management, will have a significant
adverse impact on its financial position or results of operations.
16. RELATED PARTY TRANSACTIONS
As of March 26, 2000, Miami Subs leased five restaurant properties from Kavala,
Inc., a private company owned by Gus Boulis, a former shareholder of Miami Subs.
Future minimum rental commitments due to Kavala at March 26, 2000 under these
existing leases was approximately $1.5 million. In 1997, Miami Subs leased a
then vacant, non-Miami Subs property to a company owned by Boulis. In connection
with the acquisition of Miami Subs in November 1998, Nathans purchased all of
the shares of Miami Subs Common Stock owned by Boulis for $4,200 and he resigned
all positions therein.
F-24
57
NATHAN'S FAMOUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Mr. Donald L. Perlyn has been an officer of Miami Subs since 1990, a Director
since 1997 and President and Chief Operating Officer since July 1998. Mr. Perlyn
has been a director of Nathans since October 1999. Mr. Perlyn serves as a member
of the Board of Directors of Arthur Treachers Inc. Miami Subs has been granted
certain exclusive co-branding rights by Arthur Treachers, Inc. and Mr. Perlyn
has been granted options to acquire approximately 175,000 shares of Arthur
Treachers' common stock.
17. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 2000, the Company's management continued to
monitor and evaluate the collectibility and potential impairment of its assets,
in particular, notes receivable, and certain fixed assets. In connection
therewith, additional allowances for doubtful accounts of $399, impairment
charges on certain notes receivable of $273 and impairment charges on fixed
assets of $465 were recorded in the fourth quarter. Additionally, Nathans
recorded a $191 lease rental reserve resulting from the default of subleases for
space which is not expected to be utilized by Nathans and $236 in connection
with the satisfaction of certain financial guarantees. It is management's
opinion that these adjustments are properly recorded in the fourth quarter based
upon the facts and circumstances that became available in that period.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except share data)
---------------- ---------------- -------------- ----------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal Year 2000
Revenues $ 8,074 $ 8,219 $ 12,048 $ 10,187
Gross profit (a) 2,528 2,585 3,152 2,584
Net (loss) income 469 616 (227) (2,128)
========== ========== ========== =========
Per share information:
Net (loss) income per share:
Basic (b) $ .10 $ .13 $ (.03) $ (.30)
========== ========== ========== =========
Diluted (b) $ .10 $ .13 $ (.03) $ (.30)
========== ========== ========== =========
Shares used in computation of net income per share:
Basic (b) 4,722 4,722 7,040 7,040
========== ========== ========== =========
Diluted (b) 4,744 4,722 7,040 7,040
========== ========== ========== =========
Fiscal Year 1999
Revenues $ 7,821 $ 8,166 $ 7,215 $ 6,380
Gross profit (a) 2,560 2,650 2,181 1,753
Net income 574 751 412 991
========== ========== ========== ==========
Per share information:
Net income per share:
Basic $ .12 $ .16 $ .09 $ .21
========= ========= ========= =========
Diluted $ .12 $ .16 $ .09 $ .21
========= ========= ========= =========
Shares used in computation of net income per share:
Basic 4,722 4,722 4,722 4,722
========== ========== ========== ==========
Diluted 4,762 4,754 4,750 4,753
========== ========== ========== ==========
(a) Gross profit represents the difference between sales and the cost sales.
(b) The sum of the quarters does not equal the full year per share amounts
included in the accompanying consolidated statements of operations due to
the effect of the weighted average number of shares outstanding during the
fiscal years as compared to the quarters.
F-25
58
REPORT OF INDEPENDENT PUBLIC ACCOUTANTS ON SCHEDULE
To Nathan's Famous, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Nathan's Famous, Inc.
and subsidiaries, included in this Form 10-K and have issued our report thereon
dated June 21, 2000. Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
New York, New York
June 21, 2000
S-1
59
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. C COL. D COL. E
Additions
Balance charged Additions
at to charged to Balance at
Description costs and other end of period
beginning expenses accounts Deductions
of period
YEAR ENDED MARCH 29, 2000
Allowance for doubtful accounts - notes and 404 (e)
accounts receivable $ 467 $ 895 $ 32 (c) $ 989 (a) $ 809
========= ========= ========= ======== =========
Lease termination cost $ - $ - $ 660 (d) $ - $ 660
========= ========= ========= ======== =========
YEAR ENDED MARCH 28, 1999:
Allowance for doubtful accounts - notes and $ 79 (a)
=========
accounts receivable $ 543 $ 44 $ 29 (c) $ 70 (b) $ 467
========= ========= ========= ======== =========
YEAR ENDED MARCH 26, 1998:
Allowance for doubtful accounts - notes and $ 85 (a)
=========
accounts receivable $ 581 $ 80 $ - $ 33 (b) $ 543
========= ========= ========= ======== =========
(a) Uncollectible amounts written off
(b) Uncollectible advertising fund receivables
(c) Provision charged to advertising fund
(d) Lease termination charge to purchase accounting
(e) Acquired
S-2